-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbDpWPWvT64nhdKEqWCOpLvlmN7lYJNa7uU3fNyKcGE9CHavuMfVGFwrQC/k5b6e st1FQMZ0A7y3iPiApSotSg== 0001011438-02-000378.txt : 20020515 0001011438-02-000378.hdr.sgml : 20020515 20020515164650 ACCESSION NUMBER: 0001011438-02-000378 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPLAY ENTERTAINMENT CORP CENTRAL INDEX KEY: 0001057232 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330102707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24363 FILM NUMBER: 02653234 BUSINESS ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 BUSINESS PHONE: 9495536655 MAIL ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 10-Q 1 form10-q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24363 INTERPLAY ENTERTAINMENT CORP. (Exact name of the registrant as specified in its charter) DELAWARE 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16815 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92606 (Address of principal executive offices) (949) 553-6655 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS ISSUED AND OUTSTANDING AT MAY 12, 2001 ----- -------------------------------------- Common Stock, $0.001 par value 93,060,857 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q MARCH 31, 2002 TABLE OF CONTENTS -------------- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 3 Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2002 and 2001 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2002 and 2001 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securites and Use of Proceeds 33 Item 6. Exhibits and Reports on Form 8-K 33 SIGNATURES 35 Page 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) MARCH 31, DECEMBER 31, ASSETS 2002 2001 -------------- ------------- Current Assets: (UNAUDITED) Cash $ 61 $ 119 Trade receivables from related parties, net of allowances of $2,322 and $4,025, respectively 3,445 6,175 Trade receivables, net of allowances of $4,123 and $3,516, respectively 1,986 3,312 Inventories 3,903 3,978 Prepaid licenses and royalties 10,499 10,341 Other current assets 675 1,162 ------------ ------------ Total current assets 20,569 25,087 Property and equipment, net 4,656 5,038 Other assets 981 981 ------------ ------------ $ 26,206 $ 31,106 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Current debt $ - $ 1,576 Accounts payable 15,524 13,718 Accrued royalties 5,959 7,795 Other accrued liabilities 2,637 2,999 Advances from distributors and others 7,167 12,792 Advances from related party distributor 9,618 10,060 Loans from related parties 4,318 3,218 Payables to related parties 8,764 7,098 ------------ ------------ Total current liabilities 53,987 59,256 ------------ ------------ Commitments and contingencies (Notes 1, 5, 6 and 7) Stockholders' Deficit: Series A preferred stock, $.001 par value, authorized 719,424 shares; issued and outstanding zero and 383,354 shares, respectively - 11,753 Common stock, $.001 par value, authorized 100,000,000 issued and outstanding 93,060,857 and 44,995,821 shares, respectively 93 45 Paid-in capital 121,396 110,701 Accumulated deficit (149,445) (150,807) Accumulated other comprehensive income 175 158 ------------ ------------ Total stockholders' deficit (27,781) (28,150) ------------ ------------ $ 26,206 $ 31,106 ============ ============
See accompanying notes. Page 3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues $ 9,207 $ 15,465 Net revenues from related party distributors 6,168 1,373 ------------- ------------- Total net revenues 15,375 16,838 Cost of goods sold 4,477 10,485 ------------- ------------- Gross profit 10,898 6,353 ------------- ------------- Operating expenses: Marketing and sales 1,654 6,148 General and administrative 3,016 2,478 Product development 4,698 5,381 ------------- ------------- Total operating expenses 9,368 14,007 ------------- ------------- Operating income (loss) 1,530 (7,654) ------------- ------------- Other income (expense): Interest expense (942) (662) Other 907 (106) ------------- ------------- Net income (loss) $ 1,495 $ (8,422) ------------- ------------- Cumulative dividend on participating preferred stock $ 133 $ 300 Accretion of warrant - 199 ------------- ------------- Net income (loss) available to common stockholders $ 1,362 $ (8,921) ============= ============= Net income (loss) per common share: Basic $ 0.03 $ (0.30) ============= ============= Diluted $ 0.02 $ (0.30) ============= ============= Shares used in calculating net income (loss) per common share: Basic 54,437,592 30,153,572 ============= ============= Diluted 54,502,505 30,153,572 ============= =============
See accompanying notes. Page 4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: (DOLLARS IN THOUSANDS) Net income (loss) $ 1,495 $ (8,422) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 463 629 Non-cash interest expense 74 - Other 17 (22) Changes in assets and liabilities: Trade receivables, net (133) (5,718) Trade receivables from related parties 4,189 9,338 Inventories 75 (146) Prepaid licenses and royalties (158) (258) Other current assets 487 (406) Accounts payable 1,806 (1,577) Accrued royalties (1,836) (1,570) Other accrued liabilities (362) 4,460 Payables to related parties 437 2,016 Advances from distributors and others (6,067) 5,274 ----------- ----------- Net cash provided by (used in) operating activities 487 3,598 ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (81) (579) ----------- ----------- Net cash used in investing activities (81) (579) ----------- ----------- Cash flows from financing activities: Net payment of line of credit (550) - Net payment of previous line of credit - (326) Net borrowings from supplemental line of credit - 2,074 Proceeds from exercise of stock options 86 9 ----------- ----------- Net cash (used in) provided by financing activities (464) 1,757 ----------- ----------- Net (decrease) increase in cash (58) 4,776 Cash, beginning of period 119 2,835 ----------- ----------- Cash, end of period $ 61 $ 7,611 =========== =========== Supplemental cash flow information: Cash paid for: Interest $ 106 $ 662 Supplemental disclosures of noncash transactions: Acquisition of nine percent interest in Shiny $ - $ 600 Accrection of preferred stock to redemption value - 199 Dividend payable on partial conversion of preferred stock 1,229 - Accrued dividend on participating preferred stock 133 300 Borrowings from former Chairman used to pay down line of credit 1,026 -
See accompanying notes. Page 5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp. and its subsidiaries (the "Company") reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission. FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN The Company has incurred substantial operating losses and at March 31, 2002, had a stockholders' deficit of $27.8 million and a working capital deficit of $33.4 million. The Company has historically funded its operations primarily through the use of lines of credit, royalty and distribution fee advances, cash generated by the private sale of securities, and proceeds of its initial public offering. In April 2001, the Company entered into a three year loan and security agreement ("L&S Agreement") with a bank providing for a $15.0 million working capital line of credit secured by all the assets of the Company. Concurrently, the Company's former Chairman provided the bank a $2 million personal guarantee, secured by $1 million in cash. In addition, the Chairman provided the Company with $3 million payable in March 2002, with interest at 10 percent. The Company was not in compliance with some of the financial covenants under the line of credit at December 31, 2001. On October 26, 2001, the bank notified the Company that the credit agreement was being terminated, that all related amounts outstanding were immediately due and payable and that the Company would no longer be able to draw on the credit facility to fund future operations. In February 2002, the bank drew-down on $1.0 million of the $2.0 million personal guarantee provided by the Company's former Chairman, which in combination with cash paid by the Company, substantially paid off the remaining outstanding balance on the line of credit. In March 2002, the Company entered into a forbearance agreement with the bank and its former Chairman; subsequent to that agreement, the Company repaid all remaining amounts due the bank under the line of credit and agreed to repay its former Chairman for the $1.0 million drawn-down by the bank pursuant to the former Chairman's guarantee. The Company repaid all amounts due to its former Chairman in April 2002 with proceeds from the sale of Shiny Entertainment, Inc. ("Shiny"). To reduce its working capital needs, the Company has implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, cancellation or suspension of development on future titles, which management believes do not meet sufficient projected profit margins, and the scaling back of certain marketing programs. Management will continue to pursue various alternatives to improve future operating results, and further expense reductions, some of which may have a long-term adverse impact on the Company's ability to generate successful future business activities. In addition, the Company continues to seek external sources of funding, including but not limited to, a sale or merger of the Company, a private placement of the Company's capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve the Company's long-term strategic objectives. In this regard, the Company completed the sale of Shiny in April 2002, for approximately $47.2 million (Note 2). Management believes that the proceeds from the sale, following the repayment of third party obligations, which are a condition to the transaction, along with operating revenues from future product releases, will be sufficient to fund the Company's operations at least through December 31, 2002. Page 6 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 However, if the combination of proceeds from the sale of Shiny and operating revenues from future product releases are not sufficient to fund the Company's operations, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with the Company's historical operating losses and its deficits in stockholders' equity and working capital, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include sales returns and allowances, cash flows used to evaluate the recoverability of prepaid licenses and royalties and long-lived assets, and certain accrued liabilities related to restructuring activities and litigation. RECLASSIFICATIONS Certain reclassifications have been made to the prior period's financial statements to conform to classifications used in the current period. PREPAID LICENSES AND ROYALTIES Prepaid licenses and royalties consist of license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. These payments are contingent upon the successful completion of milestones, which generally represent specific deliverables. Royalty advances are recoupable against future sales based upon the contractual royalty rate. The Company amortizes the cost of licenses, prepaid royalties and other outside production costs to cost of goods sold over six months commencing with the initial shipment in each region of the related title. The Company amortizes these amounts at a rate based upon the actual number of units shipped with a minimum amortization of 75 percent in the first month of release and a minimum of 5 percent for each of the next five months after release. This minimum amortization rate reflects the Company's typical product life cycle. Management evaluates the future realization of such costs quarterly and charges to cost of goods sold any amounts that management deems unlikely to be fully realized through future sales. Such costs are classified as current and noncurrent assets based upon estimated product release date. SOFTWARE DEVELOPMENT COSTS Research and development costs, which consist primarily of software development costs, are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed", provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under the Company's current practice of developing new products, the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model. The Company has not capitalized any software development costs on internal development projects, as the eligible costs were determined to be insignificant. Page 7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 ACCRUED ROYALTIES Accrued royalties consist of amounts due to outside developers based on contractual royalty rates for sales of shipped titles. The Company records a royalty expense based upon a contractual royalty rate after it has fully recouped the royalty advances paid to the outside developer, if any, prior to shipping a title. REVENUE RECOGNITION Revenues are recorded when products are delivered to customers in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and SEC Staff Accounting Bulletin No. 101, Revenue Recognition. With the signing of the Vivendi Universal Games, Inc. ("Vivendi") distribution agreement in August 2001, substantially all of the Company's sales are made by two related party distributors (Notes 5 and 10) as Vivendi owns approximately 5 percent of the outstanding shares of the Company's common stock. The Company recognizes revenue from sales by distributors, net of sales commissions, only as the distributor recognizes sales of the Company's products to unaffiliated third parties. For those agreements that provide the customers the right to multiple copies of a product in exchange for guaranteed amounts, revenue is recognized at the delivery of the product master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. Guaranteed minimum royalties on sales that do not meet the guarantee are recognized as the minimum payments come due. The Company is generally not contractually obligated to accept returns, except for defective, shelf-worn and damaged products in accordance with negotiated terms. However, on a case by case negotiated basis, the Company permits customers to return or exchange product and may provide markdown allowances on products unsold by a customer. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists", revenue is recorded net of an allowance for estimated returns, exchanges, markdowns, price concessions and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves ultimately required could differ materially in the near term from the amounts included in the accompanying consolidated financial statements. Customer support provided by the Company is limited to telephone and Internet support. These costs are not material and are charged to expenses as incurred. RECENT ACCOUNTING PRONOUNCEMENTS In April 2001, the Emerging Issues Task Force reached a consensus on Issue No. 00-25 ("EITF 00-25"), "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products", which states that consideration from a vendor to a reseller of the vendor's products is presumed to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. That presumption is overcome and the consideration can be categorized as a cost incurred if, and to the extent that, a benefit is or will be received from the recipient of the consideration. That benefit must meet certain conditions described in EITF 00-25. The Company adopted the provisions of EITF 00-25 on January 1, 2002 and as a result net revenues and marketing expenses were reduced by $0.5 million for the three months ended March 31, 2001. The adoption of EITF 00-25 did not impact the Company's net loss for the three months ended March 31, 2001. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. Under the new rules all acquisition transactions entered into after June 30, 2001, must be accounted for on the purchase method and goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets on January 1, 2002. The adoption of SFAS No. 142 did not have a material impact on the Company's consolidated financial position or results of operations. Goodwill amortization for the three months ended March 31, 2001 was $96,000. With the sale of Shiny, the Company no longer has any goodwill assets. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived Page 8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 assets and the associated asset retirement costs. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002, with early application encouraged and generally are to be applied prospectively. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The Company adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial position or results of operations. NOTE 2. SUBSEQUENT EVENT On April 30, 2002, the Company consummated the sale of Shiny, pursuant to the terms of a Stock Purchase Agreement, dated April 23, 2002, as amended, among the Company, Infogrames, Shiny, Shiny's president and Shiny Group, Inc. Pursuant to the purchase agreement, Infogrames acquired all of the outstanding common stock of Shiny for approximately $47.2 million, which was paid to or for the benefit of the Company as follows: o $3.0 million in cash paid to the Company at closing; o $10.8 million to be paid to the Company pursuant to a promissory note from Infogrames providing for scheduled payments with the final payment due July 31, 2002; o $26.1 million paid directly to third party creditors of the Company; and o $7.3 million was paid to Shiny's president and Shiny Group for their common stock of Shiny that was issued to such parties to settle claims relating to the Company's original acquisition of Shiny. Concurrently with the closing of the sale, the Company settled a legal dispute with Vivendi, relating to the parties' distribution agreement. The Company also settled legal disputes with its former bank and its former Chairman, relating to the Company's April 2001 credit facility with its former bank that was partially guaranteed by its former Chairman. The disputes with Vivendi, the bank and the former Chairman were dismissed, with prejudice, following consummation of the sale. Additionally, in connection with the sale, the Company issued to Warner Bros., a division of Time Warner Entertainment Company, L.P., a Secured Convertible Promissory Note, due April 30, 2003, in the principal amount of $2.0 million. The note was issued in partial payment of amounts due Warner Bros. under the parties' license agreement for the video game based on the motion picture THE MATRIX, which is being developed by Shiny. The note is secured by all of the Company's assets, and may be converted by the holder thereof into shares of the Company's common stock on the maturity date or, to the extent there is any proposed prepayment, within the 30 day period prior to such prepayment. The conversion price is equal to the lower of (a) $0.304 and (b) an amount equal to the average closing price of a share of the Company's common stock for the five business days ending on the day prior to the conversion date, provided that in no event can the note be converted into more than 18,600,000 shares. If any amount remains due following conversion of the note into 18,600,000 shares, the remaining amount will be payable in cash. The Company agreed to register with the Securities and Exchange Commission the resale by the note holder of shares of common stock issued upon conversion of the note. Page 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 NOTE 3. INVENTORIES Inventories consist of the following:
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ (DOLLARS IN THOUSANDS) Packaged software $ 3,554 $ 3,230 CD-ROMs, cartridges, manuals, packaging and supplies 349 748 ------------ ------------ $ 3,903 $ 3,978 ============ ============
NOTE 4. PREPAID LICENSES AND ROYALTIES Prepaid licenses and royalties consist of the following:
MARCH 31, DECEMBER 31, 2002 2001 -------------- ------------- (DOLLARS IN THOUSANDS) Prepaid royalties for titles in development $ 8,189 $ 7,539 Prepaid royalties for shipped titles, net of amortization 229 710 Prepaid licenses and trademarks, net of amortization 2,081 2,092 ------------ ------------ $ 10,499 $ 10,341 ============ ============
Amortization of prepaid licenses and royalties is included in cost of goods sold and totaled $0.5 million and $2.7 million for the three months ended March 31, 2002 and 2001, respectively. NOTE 5. ADVANCES FROM DISTRIBUTORS AND OTHERS Advances from distributors and OEMs consist of the following:
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ (DOLLARS IN THOUSANDS) Advance from console hardware manufacturer $ 5,000 $ 5,000 Advances for distribution rights to a future title - 4,000 Advances for other distribution rights 2,167 3,792 ---------- ---------- $ 7,167 $ 12,792 ========== ========== Net advance from Vivendi distribution agreement $ 9,618 $ 10,060 ========== ==========
In August 2001, the Company entered into a distribution agreement with Vivendi providing for Vivendi to become the Company's distributor in North America through December 31, 2003 for substantially all of its products, with the exception of products with pre-existing distribution agreements. Under the terms of the agreement, as amended, Vivendi earns a distribution fee based on the net sales of the titles distributed. The agreement provided for three advance payments from Vivendi totaling $10.0 million. In amendments to the agreement, Vivendi agreed to advance the Company an additional $3.5 million. The distribution agreement, as amended, provides for the acceleration of the recoupment of the advances made to the Company, as defined. During the three months ended March 31, 2002, Vivendi advanced the Company an additional $3.0 million bringing the total amounts advanced to the Company under the distribution agreement with Vivendi to $16.5 million. As of March 31, 2002, Vivendi has recouped $6.9 million of its advance to the Company in connection with the North American distribution agreement as a result of sales it has made of the Company's product. In April 2002, the distribution agreement was further Page 10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 amended whereby Vivendi will distribute substantially all of the Company's products through December 31, 2002, except certain future products, which Vivendi will have the distribution rights for one year from the date of release. In March 2001, the Company entered into a supplement to a licensing agreement with a console hardware and software manufacturer under which it received an advance of $5.0 million. The advance is to be repaid based on unit sales of the products under this agreement, as defined. If the full amount of the advance is not repaid by June 2003, then the remaining outstanding balance is subject to interest at the prime rate plus one percent and is due by July 15, 2003. The advance is secured by all of the Company's assets. This advance was repaid to the console hardware and software manufacturer with proceeds from the sale of Shiny. In July 2001, the Company entered into a distribution agreement with a distributor whereby the distributor would have the North American distribution rights to a future title. In return, the distributor paid the Company an advance of $4.0 million to be recouped against future amounts due to the Company based on net sales of the future title. In January 2002, the Company sold the publishing rights to this title to the distributor in connection with a settlement agreement entered into with the third party developer. The settlement agreement provided, among other things, that the Company assign its rights and obligations under the product agreement to the third party distributor. In consideration for assigning the product agreement to the distributor, the Company was not required to repay the $4.0 million advance nor repay $1.6 million related to past royalties and interest owed to the distributor. In addition, the Company agreed to forgive $0.6 million in advances previously paid to the developer. As a result, the Company recorded net revenues of $5.6 million and a related cost of sales of $0.6 million in the three months ended March 31, 2002. Other advances from distributors are repayable as products covered by those agreements are sold. In the event the Company does not perform its obligations under any of the agreements noted above, it would be obligated to refund any advances not recouped against future sales. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of known routine claims will not have a material adverse effect on the Company's business, financial condition or results of operations. Some of the Company's license, development and distribution agreements contain provisions that allow the other party to terminate the agreement upon a change in control of the Company. In August 2001, Titus converted a portion of its Preferred Stock into Common Stock, which as of December 31, 2001 gave Titus 48 percent of the Company's total voting power. At the 2001 annual stockholders meeting on September 18, 2001, Titus exercised its voting power to elect a majority of the Board of Directors. In March 2002, Titus converted its remaining shares of preferred stock into common stock. Titus now owns approximately 72% of the Company's outstanding common stock. Some of the Company's third-party developers and licensors may assert that these events constitute a change in control of the Company and attempt to terminate their respective agreements with the Company. In particular, the Company's license for "Matrix" allows for the licensor to terminate the license if there is a substantial change of ownership or control without their approval. The agreements with a console hardware and software manufacturer (Note 5) require, among other things, that the Company continues development of the Matrix product, and that the L&S Agreement (Note 1) be maintained. As a result of the potential for termination of the Matrix license and the termination of the L&S Agreement, the Company may be required to repay the advance. In addition, the loss of the Matrix license in this matter would materially harm the Company's ability to complete the sale of Shiny and harm the Company's projected operating results and financial condition. With the sale of Shiny in April 2002, the potential termination of the Matrix license is no longer a contingency of the Company. On January 15, 2002, Rage Games Limited ("Rage") filed a breach of contract action against the Company relating to the August 3, 2000 North American distribution agreement and the February 9, 2001 OEM distribution agreement. In the complaint, Rage alleged that the Company failed to make royalty payments under these Page 11 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 agreements. Rage sought damages in the amount of $2.9 million plus interest and punitive damages. Furthermore, Rage sought to audit the Company's books, return all of Rage's software and a cease & desist of all manufacturing & further distribution of Rage's software. The Company settled all claims with Rage in April 2002. The Company's common stock currently is quoted on the Nasdaq National Market System. On February 14, 2002, the Company received a deficiency notice from Nasdaq stating that for the last 30 consecutive trading days, its common stock has not maintained a minimum market value of publicly held shares of $15.0 million and a minimum bid price per share of $3.00, as required for continued listing on the Nasdaq National Market. Additionally, the Company does not meet Nasdaq's alternative listing requirements, which require, among other things, that it have a stockholder's equity of $10 million, a minimum market value of publicly held shares of $5,000,000 and a minimum bid price per share of $1.00. The Company has been provided 90 calendar days, or until May 15, 2002, to regain compliance. If the Company fails to regain compliance, the Company expects to be notified by Nasdaq that its securities will be delisted. If this occurs, trading of the Company's common stock may be conducted on the Nasdaq SmallCap Market, if it qualified for listing at that time, in the over-the-counter market on the "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." Subsequent to March 31, 2002, the Company has applied to be moved to the NASDAQ SmallCap market. The Internal Revenue Service ("the IRS") is currently examining the Company's consolidated federal income tax returns for the years ended April 30, 1992 through 1997. The IRS has challenged the timing of certain tax deductions taken by the Company, and has asserted that an additional tax liability is due. As a result, the Company established a reserve in fiscal 2001 of $500,000, representing management's best estimate of amounts to be paid in settlement of the IRS claims. There have not been any changes in management's estimate for the three months ended March 31, 2002. NOTE 7. STOCKHOLDERS' EQUITY In March 2002, Titus converted its remaining 383,354 shares of Series A Preferred Stock into 47,492,162 shares of common stock. This conversion did not include accumulated dividends of $1.2 million on the preferred stock, these were reclassified as a payable to related parties as Titus has elected to receive the dividends in cash. Subsequent to this conversion, Titus now owns 66,988,723 shares of the Company's common stock and Titus had 72 percent of the total voting power of the Company's capital stock as of March 31, 2002. In April 2001, the Company completed a private placement of 8,126,770 units at $1.5625 per unit for total proceeds of $12.7 million, and net proceeds of approximately $11.7 million. Each unit consisted of one share of common stock and a warrant to purchase one share of common stock at $1.75 per share, which was exercisable immediately. If the Company issues additional shares of common stock at a per share price below the exercise price of the warrants, then the warrants are to be repriced, as defined, subject to stockholder approval. The warrants expire in March 2006. In addition to the warrants issued in the private placement, the Company granted the investment banker associated with the transaction a warrant for 500,000 shares of the Company's common stock. The warrant has an exercise price of $1.5625 per share and vests one year after the registration statement for the shares of common stock issued under the private placement becomes effective. The warrant expires four years after it vests. The transaction provided for registration rights with a registration statement to be filed by April 16, 2001 and become effective by May 31, 2001. The effective date of the registration statement was not met and the Company is incurring a penalty of approximately $254,000 per month, payable in cash, until the effectiveness of the registration. This obligation will continue to accrue each month that the registration statement is not declared effective and does not have a limit on the amount payable to these stockholders. Because the payment for non-compliance is cumulative, such obligation could have a material adverse effect on the consolidated financial condition of the Company. Moreover, the Company may be unable to pay these stockholders the amount of money due to them. During the three months ended March 31, 2002, the Company recorded these penalties as interest expense of $0.8 million and at March 31, 2002 had accrued penalties of $2.6 million, payable to these stockholders. Page 12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 NOTE 8. NET EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed as net earnings (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period and does not include the impact of any potentially dilutive securities. Diluted earnings per share is computed by dividing the net earnings attributable to the common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and common stock warrants.
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 -------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Net income (loss) $ 1,495 $ (8,422) ------------ ------------ Shares used to compute net income (loss) per share: Weighted-average common shares 54,437,592 30,153,572 Dilutive stock equivalents 64,913 - ------------ ------------ Dilutive potential common shares 54,502,505 30,153,572 ============ ============ Net income (loss) per share: Basic $ 0.03 $ (0.30) Diluted $ 0.02 $ (0.30) ------------ ------------
The impact of the preferred stock conversion rights into common stock shares were excluded from the net loss per share computation at March 31, 2001. There were options and warrants outstanding to purchase 13,126,865 shares of common stock at March 31, 2002, which were excluded from the earnings per share computation as the exercise price was greater than the average market price of the common shares. Due to the net loss attributable for the three months ended March 31, 2001 on a diluted basis to common stockholders, stock options and warrants have been excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive. Had net income been reported for the three months ended March 31, 2001, an additional 4,489,967 shares would have been added to diluted potential common shares. In addition, 484,848 shares of restricted common stock would have been added to diluted potential common shares. The weighted average exercise price of the outstanding stock options and common stock warrants at March 31, 2002 and 2001 was $2.16 and $3.04, respectively. NOTE 9. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of the following:
THREE MONTHS ENDED MARCH 31, ---------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Net income (loss) $ 1,495 $(8,422) Other comprehensive loss, net of income taxes: Foreign currency translation adjustments 17 (22) ---------- ---------- Total comprehensive income (loss) $ 1,512 $(8,444) ========== ==========
During the three months ended March 31, 2002 and 2001, the net effect of income taxes on comprehensive loss was immaterial. Page 13 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 NOTE 10. RELATED PARTIES Amounts receivable from and payable to related parties are as follows:
MARCH 31, DECEMBER 31, 2002 2001 ------------- ------------- (DOLLARS IN THOUSANDS) Receivables from related parties: Virgin $ 6,003 $ 7,504 Vivendi 1,393 2,437 Titus 172 260 Return allowance (4,123) (4,026) ------------- ------------- Total $ 3,445 $ 6,175 ============= ============= Payables to related parties: Virgin $ 5,797 $ 5,790 Titus 2,967 1,308 ------------- ------------- Total $ 8,764 $ 7,098 ============= =============
EVENTS WITH TITUS INTERACTIVE S.A. Titus retained Europlay as consultants to assist with the restructuring of the Company. This arrangement with Europlay is with Titus, however, the Company agreed to reimburse Titus for consulting expenses incurred on its behalf. As of March 31, 2002, the Company owed Titus $0.9 million as a result of this arrangement. In connection with the sale of Shiny, the Company agreed to pay Europlay directly for their services with the proceeds received from the sale, which they received. The Company has also entered into a commission-based agreement with Europlay where Europlay will assist the Company with strategic transactions, such as debt or equity financing, the sale of assets or an acquisition of the Company. Under this arrangement, Europlay assisted the Company with the sale of Shiny. DISTRIBUTION AND PUBLISHING AGREEMENTS TITUS INTERACTIVE S.A. In connection with the equity investments by Titus, the Company performs distribution services on behalf of Titus for a fee. In connection with such distribution services, the Company recognized fee income of zero and $20,000 for the three months ended March 31, 2002 and 2001, respectively. Amounts due to Titus at March 31, 2002 include dividends payable of $2.0 million and $0.9 million for services rendered by Europlay. Amounts due to Titus at December 31, 2001 include dividends payable of $0.7 million and $0.5 million for services rendered by Europlay. VIRGIN INTERACTIVE ENTERTAINMENT LIMITED Under an International Distribution Agreement with Virgin Interactive Entertainment Limited ("Virgin"), a wholly owned subsidiary of Titus, Virgin provides for the exclusive distribution of substantially all of the Company's products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under the Agreement, the Company pays Virgin a monthly overhead fee, certain minimum operating charges, a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on behalf of the Company. Page 14 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMEENTS (UNAUDITED) - CONTINUED MARCH 31, 2002 Under the terms of the amended International Distribution Agreement, the Company pays Virgin a monthly overhead fee of $83,000 per month for the six month period beginning January 2002, with no further overhead commitment for the remainder of the term of the International Distribution Agreement. In connection with the International Distribution Agreement, the Company incurred distribution commission expense of $0.3 million and $0.2 million for the three months ended March 31, 2002 and 2001, respectively. In addition, the Company recognized overhead fees of $0.3 million and zero for the three months ended March 31, 2002 and 2001, respectively. Under a Product Publishing Agreement with Virgin, the Company has an exclusive license to publish and distribute substantially all of Virgin's products previously released and one future product release within North America, Latin America and South America for a royalty based on net sales. In connection with the Product Publishing Agreement with Virgin, the Company earned zero and $20,000 for performing publishing and distribution services on behalf of Virgin for the three months ended March 31, 2002 and 2001, respectively. In connection with the International Distribution Agreement, the Company subleases office space from Virgin. Rent expense paid to Virgin was $27,000 and $27,000 for the three months ended March 31, 2002 and 2001, respectively. VIVENDI UNIVERSAL GAMES, INC. In connection with the distribution agreement with Vivendi, the Company incurred distribution commission expense of $0.9 million for the three months ended March 31, 2002. NOTE 11. SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in one principal business segment, which is managed primarily from the Company's U. S. headquarters. Net revenues by geographic regions were as follows:
THREE MONTHS ENDED MARCH 31, --------------------------------------------- 2002 2001 -------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT ---------- -------- ----------- -------- (DOLLARS IN THOUSANDS) North America $ 4,502 29 % $ 11,578 67 % Europe 1,403 9 3,665 21 Rest of World 11 - 712 4 OEM, royalty and licensing 9,459 62 1,358 8 ---------- -------- ----------- ------- $15,375 100 % $ 17,313 100 % ========== ======== =========== =======
NOTE 12. OTHER EXPENSE, NET In April 2002, the Company entered into a settlement agreement with the landlord of an office facility in the United Kingdom, whereby the Company returned the property back to the landlord and was released from any further lease obligations. As a result of this settlement, the Company reduced its amounts accrued for this contractual cash obligation by $0.8 million for the three months ended March 31, 2002. Page 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT The information contained in this Form 10-Q is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-K. This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions. For example, any statements regarding future cash flow, financing activities and cost reduction measures are forward-looking statements and there can be no assurance that the Company will achieve its operating plans or generate positive cash flow in the future, arrange adequate financing or complete strategic transactions on satisfactory terms, if at all, or that any cost reductions effected by the Company will be sufficient to offset any negative cash flow from operations. Additional risks and uncertainties include possible delays in the completion of products, the possible lack of consumer appeal and acceptance of products released by the Company, fluctuations in demand for the Company's products, lost sales because of the rescheduling of products launched or orders delivered, failure of the Company's markets to continue to grow, that the Company's products will remain accepted within their respective markets, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will retain key development and management personnel, that the Company's forecasts will accurately anticipate market demand and that there will be no material adverse change in the Company's operations or business. Additional factors that may affect future operating results are discussed in more detail in "Factors Affecting Future Performance" below as well as the Company's Annual Report on Form 10-K on file with the Securities and Exchange Commission. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements, and the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. In addition, risks, uncertainties and assumptions change as events or circumstances change. The Company disclaims any obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by or on behalf of the Company. Page 16 RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues:
THREE MONTHS ENDED MARCH 31, ----------------------------------------------- 2002 2001 ---------------------- ----------------------- % OF NET % OF NET AMOUNT REVENUES AMOUNT REVENUES ---------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Net revenues $ 15,375 100% $ 16,838 100% Cost of goods sold 4,477 29% 10,485 62% ---------- ---------- ----------- ---------- Gross profit 10,898 71% 6,353 38% ---------- ---------- ----------- ---------- Operating expenses: Marketing and sales 1,654 11% 6,148 36% General and administrative 3,016 20% 2,478 15% Product development 4,698 30% 5,381 32% ---------- ---------- ----------- ---------- Total operating expenses 9,368 61% 14,007 83% ---------- ---------- ----------- ---------- Operating income (loss) 1,530 10% (7,654) -45% Other expense 35 0% 768 5% ---------- ---------- ----------- ---------- Net income (loss) $ 1,495 10% $ (8,422) -50% ========== ========== =========== ========== Net revenues by geographic region: North America $ 4,502 29% $ 11,103 66% International 1,414 9% 4,377 26% OEM, royalty and licensing 9,459 62% 1,358 8% Net revenues by platform: Personal computer $ 4,200 27% $ 11,919 71% Video game console 1,716 11% 3,561 21% OEM, royalty and licensing 9,459 62% 1,358 8%
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES Net revenues for the three months ended March 31, 2002 were $15.4 million, a decrease of 9 percent compared to the same period in 2001. This decrease resulted from a 60 percent decrease in North American net revenues, a 68 percent decrease in International net revenues offset by a 597 percent increase in OEM, royalties and licensing revenues. North American net revenues for the three months ended March 31, 2002 were $4.5 million. The decrease in North American net revenues in 2002 was mainly due to not releasing any titles in 2002 compared to 3 titles in 2001 resulting in a decrease in North American sales of $10.8 million, partially offset by a decrease in product returns and price concessions of $4.2 million as compared to the 2001 period. The decrease in title releases across all platforms is a result of our continued focus on product planning and the releasing of fewer, higher quality titles. International net revenues for the three months ended March 31, 2002 were $1.4 million. The decrease in International net revenues for the three months ended March 31, 2002 was mainly due to the reduction in title releases during the year which resulted in a $2.5 million decrease in revenue offset by an increase in product returns and price concessions of $0.5 million compared to the 2001 period. Our product planning efforts during 2002 also contributed to the reduction of titles released in the International markets. We expect that both our North American and International publishing net revenues in fiscal 2002 will increase compared to fiscal 2001, as we anticipate releasing more major titles than in 2001. We currently have 6 to 8 titles scheduled for release during the remainder of the year. OEM, royalty and licensing net revenues for the three months ended March 31, 2002 were $9.5 million, an increase of $8.1 million as compared to the same period in 2001. The OEM business was consistent with the same period in 2001. The three months ended March 31, 2002 also included revenues related to the sale of publishing rights for one of our products and the recognition of deferred revenue for a licensing transaction. In January 2002, we sold the publishing rights to this title to the distributor in connection with a settlement agreement entered into with the third party developer. The settlement agreement provided, among other things, that we assign our rights and Page 17 obligations under the product agreement to the third party distributor. As a result, we recorded net revenues of $5.6 million in the three months ended March 31, 2002.In February 2002, a licensing transaction we entered into in 1999 expired and we recognized revenue of $1.2 million, the unearned portion of the minimum guarantee. We expect that OEM, royalty and licensing net revenues in fiscal 2002 will increase compared to fiscal 2001 as a result of these two one-time transactions combined with a consistent level of OEM business. PLATFORM NET REVENUES PC net revenues for the three months ended March 31, 2002 were $4.2 million, a decrease of 65 percent compared to the same period in 2001. The decrease in PC net revenues in 2002 was primarily due to not releasing any major hit titles in 2002 as compared to two major hit titles released in 2001. We expect our PC net revenues to decrease in 2002 as compared to 2001 as we expect to release only two to three new titles as we continue to focus more on next generation console products. Video game console net revenues decreased 52 percent for the three months ended March 31, 2002 compared to the same period in 2001, due to not releasing any major hit titles in 2002 as compared to one major hit title in 2001. We anticipate releasing four to six new console titles in fiscal 2002 and expect net revenues to increase in fiscal 2002 partly due to the fact that we anticipate releasing the major hit title Baldur's Gate: Dark Alliance (PlayStation 2) on Xbox and Gamecube in the latter half of 2002. COST OF GOODS SOLD; GROSS PROFIT MARGIN Our cost of goods sold decreased 57 percent to $4.5 million in the three months ended March 31, 2002 compared to the same period in 2001. The decrease was primarily due to the decrease in PC and console net revenues as a result of not releasing any new titles in the 2002 period. We expect our cost of goods sold to decrease in 2002 as compared to 2001 due to not anticipating any major impairments of our prepaid royalties, offset by our expected higher gross revenues from the planned release of more major titles in 2002. Our gross margin increased to 71 percent for 2002 from 38 percent in 2001. This was due to the publishing and licensing transactions in 2002, which did not bear any significant cost of goods. We expect our gross profit margin and gross profit to increase in fiscal 2002 as compared to fiscal 2001 as we expect not to incur any significant, unusual product returns and price concessions or any write-offs of prepaid royalties in 2002. MARKETING AND SALES Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. Marketing and sales expenses for the three months ended March 31, 2002 were $1.7 million, a 73 percent decrease as compared to the 2001 period. The decrease in marketing and sales expenses is due to a $36 million reduction in advertising and retail marketing support expenditures due to not releasing any product in 2002 and a $1.2 million decrease in personnel costs and general expenses due in part to our shift from a direct sales force for North America to a distribution arrangement with Vivendi. The decrease in marketing and sales expenses was partially offset by $0.3 million in overhead fees paid to Virgin under our April 2001 settlement with Virgin (See Activities with Related Parties). We expect our marketing and sales expenses to decrease in fiscal 2002 compared to fiscal 2001, due to fewer overall planned title releases in fiscal 2002 across all platforms, lower personnel costs from our reduced headcount and a reduction in overhead fees paid to Virgin pursuant to the April 2001 settlement. GENERAL AND ADMINISTRATIVE General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, bad debt expenses and other related operating expenses. General and administrative expenses for the three months ended March 31, 2002 were $3.0 million, a 22 percent increase as compared to the same period in 2001. The increase is due in part to $0.4 million in loan termination fees associated with the termination of our line of credit and $0.5 million in consulting expenses payable to our investment bankers, Euorplay, incurred to assist us with the restructuring of the company offset by a $0.4 million decrease in personnel costs and general expenses. We expect our general and administrative expenses to decrease in fiscal 2002 compared to fiscal 2001 primarily due to the reduction in headcount and the continued reduction in other related costs. Page 18 PRODUCT DEVELOPMENT We charge internal product development expenses, which consist primarily of personnel and support costs, to operations in the period incurred. Product development expenses for the three months ended March 31, 2002 were $4.7 million, a 13 percent decrease as compared to the same period in 2001. This decrease is due to a $0.7 million decrease in personal costs as a result of a reduction in headcount. We expect our product development expenses to decrease in fiscal 2002 compared to fiscal 2001 as a result of lower headcount and the sale of Shiny Entertainment, Inc. in April 2002. OTHER EXPENSE, NET Other expenses for the three months ended March 31, 2002 were $35,000, a 95 percent decrease as compared to the same period in 2001. The decrease was due to no interest expense related to lower net borrowings on our line of credit, no losses associated with foreign currency exchanges and $0.9 million associated with a gain in the settlement and termination of a building lease in the United Kingdom offset by a $0.8 million penalty due to a delay in the effectiveness of a registration statement in connection with our private placement of our common stock. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through the use of borrowings, royalty and distribution fee advances, cash generated by the private sale of securities, proceeds of the initial public offering and from results of operations. As of March 31, 2002, our principal resources included cash of $61,000. In April 2001, we entered into a three year loan and security agreement with a bank providing for a $15.0 million working capital line of credit secured by all of our assets. Concurrently, our former Chairman provided the bank a $2 million personal guarantee, secured by $1 million in cash. In addition, the Chairman provided us with $3 million payable in March 2002, with interest at 10 percent. We were not in compliance with some of the financial covenants under the line of credit at December 31, 2001. On October 26, 2001, the bank notified us that the credit agreement was being terminated, that all related amounts outstanding were immediately due and payable and that we would no longer be able to draw on the credit facility to fund future operations. In February 2002, the bank drew-down on $1.0 million of the $2.0 million personal guarantee provided by our former Chairman, which in combination with cash paid by us, substantially paid off the remaining outstanding balance on the line of credit. In March 2002, we entered into a forbearance agreement with the bank and our former Chairman; subsequent to that agreement, we repaid all remaining amounts due the bank under the line of credit and agreed to repay our former Chairman for the $1.0 million drawn-down by the bank pursuant to the former Chairman's guarantee. We repaid all amounts due to our former Chairman in April 2002 with proceeds from the sale of Shiny. To reduce our working capital needs, we have implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, cancellation or suspension of development on future titles, which management believes do not meet sufficient projected profit margins, and the scaling back certain marketing programs. Management will continue to pursue various alternatives to improve future operating results and further expense reductions, some of which may have a long-term adverse impact on our ability to generate successful future business activities. In addition, we continue to seek external sources of funding, including but not limited to, a sale or merger of the company, a private placement of our capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve our long-term strategic objectives. In this regard, we completed the sale of Shiny in April 2002, for approximately $47 million. Along with our projected product releases and cost cutting measures, management believes that the proceeds from the sale of Shiny, following the repayment of third party obligations, which are a condition to the transaction, should be sufficient to fund our operations through December 31, 2002. We are currently negotiating certain distribution rights with other distributors to succeed Vivendi. If we are unable to secure these distribution rights on terms favorable to us, or if the performance of the titles we release does not achieve our expectations, we will be required to seek alternative sources of funds, and, in such circumstances, if alternative sources of funding cannot be obtained on acceptable terms, or at all. These conditions, combined with our historical operating losses and deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any Page 19 adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. We have not had the registration statement declared effective in connection with a private placement of 8,126,770 units consisting of one share of common stock and one warrant to purchase an additional share of common stock. As a result, we are subject to a penalty of approximately $254,000 per month, payable in cash, until the registration statement is effective. This obligation will continue to accrue each month that the registration statement is not declared effective until the registration becomes effective or the shares are eligible for resale under Rule 144(k), which would go into effect on April 16, 2003. Because this payment is cumulative, this obligation could have a material adverse effect on our consolidated financial condition and results of operations. As of March 31, 2002, the amount accrued was $2.6 million. We may be unable to pay the total penalty due to the investors. Our primary capital needs have historically been to fund working capital requirements necessary to fund our net losses, our sales growth, the development and introduction of products and related technologies and the acquisition or lease of equipment and other assets used in the product development process. Our operating activities provided cash of $0.5 million during the three months ended March 31, 2002, primarily attributable to net income of $1.5 million, collections of accounts receivable and an increase in accounts payable due to delays in payments to vendors, substantially offset by payments of royalty liabilities and recoupment of advances received by distributors. Net cash used by financing activities of $0.5 million for the three months ended March 31, 2002, consisted primarily of repayments of our working capital line of credit. Cash used in investing activities of $0.1 million for the three months ended March 31, 2002 consisted of normal capital expenditures, primarily for office and computer equipment used in our operations. We do not currently have any material commitments with respect to any future capital expenditures. The following summarizes our contractual obligations under non-cancelable operating leases and other borrowings at March 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
Less Than 1 - 3 After March 31, 2002 Total 1 Year Years 3 Years ----------- ----------- --------- --------- (In thousands) Contractual cash obligations: Other borrowings $ 4,318 $ 4,318 $ - $ - Non-cancelable operating lease obligations 6,284 1,403 3,053 1,828 ----------- ----------- --------- --------- Total contractual cash obligations $10,602 $ 5,721 $3,053 $1,828 =========== =========== ========= =========
In April 2002, we entered into a settlement agreement with the landlord of an office facility in the United Kingdom, whereby we returned the property back to the landlord and were released from any further lease obligations. This settlement reduced our total contractual cash obligations by $1.3 million through fiscal 2005. During the three months of 2002, we did not release sufficient products to generate sufficient accounts receivable to obtain an alternative to our terminated credit line. We also anticipate that delays in product releases could continue in the short-term, and, absent the sale of Shiny, funds available from ongoing operations would not have been sufficient to satisfy our projected working capital and capital expenditure requirements. We will continue to pursue various alternatives to improve future operating results, including strategic alliances and further expense reductions, some of which may have a long-term adverse impact on our ability to generate successful future business activities. In addition, we continue to seek external sources of funding, including but not limited to, a sale or merger of the company, a private placement of our capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve our long-term strategic objectives. ACTIVITIES WITH RELATED PARTIES Our operations involve significant transactions with Titus, our majority stockholder, Virgin, a wholly-owned subsidiary of Titus, and Vivendi, an indirect owner of 5 percent of our common stock. In addition, we obtained financing from the former Chairman of the company. Page 20 TRANSACTIONS WITH TITUS In March 2002, Titus converted its remaining 383,354 shares of Series A preferred stock into approximately 47.5 million shares of our common stock. Titus now owns approximately 67 million shares of common stock, which represents approximately 72% of our outstanding common stock, our only voting security, immediately following the conversion. Titus retained Europlay as consultants to assist with the restructuring of the company. This arrangement with Europlay is with Titus, however, we agreed to reimburse Titus for consulting expenses incurred on our behalf. As of March 31, 2002, we owed Titus $0.9 million as a result of this arrangement. In connection with the sale of Shiny, we agreed to pay Europlay directly for their services with the proceeds received from the sale. We have also entered into a commission-based agreement with Europlay where Europlay will assist us with strategic transactions, such as debt or equity financing, the sale of assets or an acquisition of the company. Under this arrangement, Europlay assisted us with the sale of Shiny. In connection with the equity investments by Titus, we perform distribution services on behalf of Titus for a fee. In connection with such distribution services, we recognized fee income of zero and $20,000 for the three months ended March 31, 2002 and 2001, respectively. In March 2002, we entered into a distribution agreement with Titus pursuant to which we granted to Titus the exclusive right to distribute one of our products for the Sony Playstation console in North America, South America and Central America in exchange for a minimum guarantee of $100,000 for the first 71,942 units of the product sold, plus $.69 per unit on any product sold above the 71,942 units. As of March 31, 2002 and December 31, 2001, Titus owed us $172,000 and $260,000, respectively, and we owed Titus $3.0 million and $1.3 million, respectively. Amounts due to Titus at March 31, 2002 include dividends payable of $2.0 million and $0.9 million for services rendered by Europlay. Amounts due to Titus at December 31, 2001 include dividends payable of $740,000 and $450,000 for services rendered by Europlay. On April 26, 2002, we entered into an agreement with Titus, pursuant to which, among other things, we sold to Titus all right, title and interest in the games "EarthWorm Jim", "Messiah", "Wild 9", "R/C Stunt Copter", "Sacrifice", "MDK", "MDK II", and "Kingpin", and Titus licensed from us the right to develop, publish, manufacture and distribute the games "Hunter I", "Hunter II", "Icewind Dale I", "Icewind Dale II", and "BG: Dark Alliance II" solely on Nintendo Advance GameBoy game system for the life of the games. As consideration for these rights, Titus issued to us a promissory note in the principal amount of $3.5 million, which note bears interest at 8% per annum. The promissory note is due on August 31, 2002, and may be paid, at Titus' option, in cash or in shares of Titus common stock with a per share value equal to 90% of the average trading price of Titus' common stock over the 5 days immediately preceding the payment date. Pursuant to our April 26, 2002 agreement with Titus, on or before July 25, 2002, we have the right to solicit offers from and negotiate with third parties to sell the rights and licenses granted under the April 26, 2002 agreement. If we enter into a binding agreement with a third party to sell these rights and licenses for an amount in excess $3.5 million, we will rescind the April 26, 2002 agreement with Titus and recover all rights granted and release Titus from all obligations thereunder. Moreover, we have provided Titus with a guarantee under this agreement, which provides that in the event Titus does not achieve gross sales of at least $3.5 million by June 25, 2003, and the shortfall is not the result of Titus' failure to use best commercial efforts, we will pay to Titus the difference between $3.5 million and the actual gross sales achieved by Titus, not to exceed $2 million. TRANSACTIONS WITH VIRGIN, A WHOLLY OWNED SUBSIDIARY OF TITUS In February 1999, we entered into an International Distribution Agreement with Virgin, which provides for the exclusive distribution of substantially all of our products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under this agreement, as amended, we pay Virgin a monthly overhead fee, certain minimum operating charges, a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on our behalf. Page 21 Under the April 2001 settlement, we pay Virgin a monthly overhead fee of $83,000 per month for the six month period beginning January 2002, with no further overhead commitment for the remainder of the term of the International Distribution Agreement. In connection with the International Distribution Agreement, we incurred distribution commission expense of $0.3 million and $0.2 million for the three months ended March 31, 2002 and 2001, respectively. In addition, we recognized overhead fees of $250,000 and zero for the three months ended March 31, 2002 and 2001, respectively. We have also entered into a Product Publishing Agreement with Virgin, which provides us with an exclusive license to publish and distribute substantially all of Virgin's products within North America, Latin America and South America for a royalty based on net sales. As part of terms of the April 2001 settlement between Virgin and us, the Product Publishing Agreement was amended to provide for us to publish only one future title developed by Virgin. In connection with the Product Publishing Agreement with Virgin, we earned zero and $20,000 for performing publishing and distribution services on behalf of Virgin for the three months ended March 31, 2002 and 2001, respectively. In connection with the International Distribution Agreement, we sublease office space from Virgin. Rent expense paid to Virgin was $27,000 and $27,000 for the three months ended March 31, 2002 and 2001, respectively. As of March 31, 2002 and December 31, 2001, Virgin owed us $6.0 million and $7.5 million, and we owed Virgin $5.8 million and $5.8 million, respectively. TRANSACTIONS WITH VIVENDI In connection with a distribution agreement with Vivendi, which indirectly owns approximately 5 percent of our common stock at March 31, 2002 but does not have representation on our Board of Directors, Vivendi is our distributor in North America through December 31, 2002 for substantially all of our products, with the exception of products with pre-existing distribution agreements and certain selected future titles. Under the terms of the agreement, as amended, Vivendi earns a distribution fee based on the net sales of the titles distributed. Under the agreement, Vivendi made advance payments to us totaling $16.5 million. Vivendi will recoup their advances from future sales of our products, which will reduce our future cash in-flows. As of March 31, 2002, Vivendi has recouped $6.9 million of the advance payments. In connection with the sale of Shiny, Vivendi was repaid $6.5 million of their advances from the proceeds. In connection with the distribution agreement with Vivendi, we incurred distribution commission expense of $0.9 million and zero for the three months ended March 31, 2002 and 2001, respectively. As of March 31, 2002 and December 31, 2001, Vivendi owed us $1.4 million and $2.4 million, respectively. In April 2002, we entered into an agreement with Vivendi, pursuant to which, among other things, the parties amended the terms of the August 13, 2001 distribution agreement, as amended, as follows: (i) Vivendi was repaid $6.5 million of their advances under the August 13, 2002 distribution agreement; (ii) Vivendi maintains the exclusive distribution rights to our back-catalog titles, including "Baldur's Gate: Dark Alliance" through December 31, 2002, plus a six month sell-off period; (iii) Vivendi will maintain exclusive distribution rights to our upcoming new titles to be released, which includes "Icewind Dale 2" for PC, "Hunter" on the Microsoft X-Box game console and "Run Like Hell" on the Sony Playstation 2 game console for a term of 1 year from the date of release of each new title, plus a 6 month sell-off period; (iv) Vivendi will retain 100% of proceeds from the distribution of "Baldur's Gate: Dark Alliance" until such time as the balance of Vivendi's advance under the August 13, 2001 distribution agreement is fully recouped; and (iv) Vivendi's distribution rights to any of our other titles under the August 13, 2001 distribution agreement were terminated. TRANSACTIONS WITH A BRIAN FARGO, A FORMER OFFICER OF THE COMPANY In connection with our working capital line of credit obtained in April 2001, we obtained a $2 million personal guarantee in favor of the bank, secured by $1.0 million in cash, from Brian Fargo, the former Chairman of the company. In addition, Mr. Fargo provided us with a $3 million loan, payable in May 2002, with interest at 10 percent. In connection with the guarantee and loan, Mr. Fargo received warrants to purchase 500,000 shares of our common stock at $1.75 per share, expiring in April 2011. In January 2002, the bank redeemed the $1.0 million in cash pledged by Mr. Fargo in connection with his personal guarantee, and subsequently we agreed to pay that amount back to Mr. Fargo. The amount was fully paid in April 2002 in connection with the sale of Shiny. Page 22 RECENT ACCOUNTING PRONOUNCEMENTS In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF 00-25"), "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products", which states that consideration from a vendor to a reseller of the vendor's products is presumed to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. That presumption is overcome and the consideration can be categorized as a cost incurred if, and to the extent that, a benefit is or will be received from the recipient of the consideration. That benefit must meet certain conditions described in EITF 00-25. We adopted the provision of EITF 00-25 on January 1, 2002 and as a result net revenues and marketing expenses were reduced by $0.5 million for the three months ended March 31, 2001. The adoption of EITF 00-25 did not impact our net loss for the three months ended March 31, 2001. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. Under the new rules all acquisition transactions entered into after June 30, 2001, must be accounted for on the purchase method and goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. We adopted the new rules on accounting for goodwill and other intangible assets January 1, 2002. Adoption of FAS 142 did not have a material impact on our consolidated financial position or results of operations. Goodwill amortization for the three months ended March 31, 2001 was $96,000. With the sale of Shiny, we no longer have any goodwill assets. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002, with early application encouraged and generally are to be applied prospectively. We do not expect the adoption of SFAS No. 143 to have a material impact on our consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). We adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. FACTORS AFFECTING FUTURE PERFORMANCE Our future operating results depend upon many factors and are subject to various risks and uncertainties. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows: WE CURRENTLY HAVE A NUMBER OF OBLIGATIONS THAT WE ARE UNABLE TO MEET WITHOUT GENERATING ADDITIONAL REVENUES OR RAISING ADDITIONAL CAPITAL. IF WE CANNOT GENERATE ADDITIONAL REVENUES OR RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, WE MAY BECOME INSOLVENT AND OUR STOCK WOULD BECOME ILLIQUID OR WORTHLESS. As of March 31, 2002, our cash balance was approximately $61,000 and our outstanding accounts payable and current debt totaled approximately $54.0 million. On April 30, 2002, in connection with the sale of Shiny, we received a cash payment of approximately $3 million and a promissory note in the principal amount of approximately $10.8 million payable over three months, and applied additional proceeds to repay approximately $26.1 million in accounts payable and current debt. Even with the proceeds we received in the Shiny sale, we will need to raise additional financing. If we do not receive sufficient financing we may (i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue operations, but incur material harm to our business, operations or Page 23 financial condition. These measures could have a material adverse effect on our ability to continue as a going concern. Additionally, because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. When a Delaware corporation is operating in the vicinity of insolvency, the Delaware courts have imposed upon the corporation's directors a fiduciary duty to the corporation's creditors. If we cannot obtain additional capital and become unable to pay our debts as they become due, our Board of Directors may be required to make decisions that favor the interests of creditors at the expense of our stockholders to fulfill its fiduciary duty. For instance, we may be required to preserve our assets to maximize the repayment of debts versus employing the assets to further grow our business and increase shareholder value. WE HAVE A HISTORY OF LOSSES, MAY NEVER GENERATE POSITIVE CASH FLOW FROM OPERATIONS AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY CURTAILING FUTURE OPERATIONS. For the three months ended March 31, 2002, our net income was $1.5 million and for the year ended December 31, 2001, our net loss was $46.3 million. Since inception, we have incurred significant losses and negative cash flow, and as of March 31, 2002 we had an accumulated deficit of $149 million. Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends on a number of factors. Some of these factors include the progress of our product development programs, the rate of growth of our business, and our products' commercial success. If we cannot generate positive cash flow from operations, we will have to continue to reduce our costs and raise working capital from other sources. These measures could include selling or consolidating certain operations, and delaying, canceling or scaling back product development and marketing programs. These measures could materially and adversely affect our ability to publish successful titles, and may not be enough to permit us to operate profitability, or at all. WE DEPEND, IN PART, ON EXTERNAL FINANCING TO FUND OUR CAPITAL NEEDS. IF WE ARE UNABLE TO OBTAIN SUFFICIENT FINANCING ON FAVORABLE TERMS, WE MAY NOT BE ABLE TO CONTINUE TO OPERATE OUR BUSINESS. Historically, our business has not generated revenues sufficient to create operating profits. To supplement our revenues, we have funded our capital requirements with debt and equity financing. Our ability to obtain additional equity or debt financing depends on a number of factors including our financial performance, the overall conditions in our industry, and our credit rating. If we cannot raise additional capital on favorable terms, we will have to reduce our costs and sell or consolidate operations. OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY IF WE ARE DELISTED FROM THE NASDAQ NATIONAL MARKET. Our common stock currently is quoted on the Nasdaq National Market System. On February 14, 2002, we received a deficiency notice from Nasdaq stating that for the last 30 consecutive trading days, our common stock has not maintained a minimum market value of publicly held shares of $15,000,000 and a minimum bid price per share of $3.00, as required for continued listing on the Nasdaq National Market. Additionally, we do not meet Nasdaq's alternative listing requirements, which require, among other things, that we have a stockholder's equity of $10 million, a minimum market value of publicly held shares of $5,000,000 and a minimum bid price per share of $1.00. We have been provided 90 calendar days, or until May 15, 2002, to regain compliance, which we do not believe will occur. If we fail to regain compliance, the Company expects to be notified by Nasdaq that its securities will be delisted. If this occurs, trading of our common stock may be conducted on the Nasdaq SmallCap Market, if we qualify for listing at that time, in the over-the-counter market on the "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." In any of those cases, investors could find it more difficult to buy or sell, or to obtain accurate quotations as to the value of our common stock. The trading price per share of our common stock likely would be reduced as a result. TITUS INTERACTIVE SA CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF DIRECTORS AND PREVENT AN ACQUISITION OF INTERPLAY THAT IS FAVORABLE TO OUR OTHER STOCKHOLDERS. On March 15, 2002, Titus converted its remaining 383,354 shares of Series A Preferred Stock into approximately 47.5 million shares of our common stock. Titus now owns approximately 67 million shares of common stock, which represents approximately 72 percent of our outstanding common stock, our only voting security, immediately following the conversion. As a consequence, Titus can control substantially all matters requiring stockholder approval, including the election of directors, subject to our stockholders' cumulative voting rights, and the approval of mergers or other business combination transactions. At our 2001 annual stockholders Page 24 meeting on September 18, 2001, Titus exercised its voting power to elect a majority of our Board of Directors. Three of the seven members of the Board are employees or directors of Titus, and Titus' Chief Executive Officer serves as our President and interim Chief Executive Officer. This concentration of voting power could discourage or prevent a change in control that otherwise could result in a premium in the price of our common stock. A SIGNIFICANT PERCENTAGE OF OUR REVENUES DEPEND ON OUR DISTRIBUTORS' DILIGENT SALES EFFORTS AND OUR DISTRIBUTORS' AND RETAIL CUSTOMERS' TIMELY PAYMENTS TO US. Since February 1999, Virgin has been the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. Our agreement with Virgin expires in February 2006. In August 2001, we entered into a Distribution Agreement with Vivendi Universal Games, Inc., (formerly known as Vivendi Universal Interactive Publishing North America), or "Vivendi," pursuant to which Vivendi distributes substantially all our products in North America, as well as in South America, South Africa, Korea, Taiwan and Australia. Our agreement with Vivendi expires in December 2002. Virgin and Vivendi each have exclusive rights to distribute our products in substantial portions of the world. As a consequence, the distribution of our products by Virgin and Vivendi will generate a substantial majority of our revenues, and proceeds from Virgin and Vivendi from the distribution of our products will constitute a substantial majority of our operating cash flows. Therefore, our revenues and cash flows could fall significantly and our business and financial results could suffer material harm if: o either Virgin or Vivendi fails to deliver to us the full proceeds owed us from distribution of our products; o either Virgin or Vivendi fails to effectively distribute our products in their respective territories; or o either Virgin or Vivendi otherwise fails to perform under their respective distribution agreement. We typically sell to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. We confront the risk of non-payment from our customers, whether due to their financial inability to pay us, or otherwise. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could cause material harm to our business. THE TERMINATION OF OUR EXISTING CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION IN THE CASH AVAILABLE TO FINANCE OUR OPERATIONS. Pursuant to our credit agreement with LaSalle Business Credit Inc., or "LaSalle", entered into in April 2001, we agreed to certain covenants. In October 2001, LaSalle notified us that the credit agreement was being terminated as a result of our failure to comply with some of those covenants and we would no longer be able to continue to draw on the credit facility to fund future operations. Because we depend on a credit agreement to fund our operations, LaSalle's termination of the credit agreement has significantly impeded our ability to fund our operations and has caused material harm to our business. We will need to enter into a new credit agreement to fund our operations. There can be no assurance that we will be able to enter into a new credit agreement or that if we do enter into a new credit agreement, it will be on terms favorable to us. THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN DEPRESSED OR TO DECLINE FURTHER. Our operating results have fluctuated in the past and may fluctuate in the future due to several factors, some of which are beyond our control. These factors include: o demand for our products and our competitors' products; o the size and rate of growth of the market for interactive entertainment software; o changes in personal computer and video game console platforms; Page 25 o the timing of announcements of new products by us and our competitors and the number of new products and product enhancements released by us and our competitors; o changes in our product mix; o the number of our products that are returned; and o the level of our international and original equipment manufacturer royalty and licensing net revenues. Many factors make it difficult to accurately predict the quarter in which we will ship our products. Some of these factors include: o the uncertainties associated with the interactive entertainment software development process; o approvals required from content and technology licensors; and o the timing of the release and market penetration of new game hardware platforms. It is likely that in some future periods our operating results will not meet the expectations of the public or of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause securities analysts and investors to revalue our stock and this may cause fluctuations in our stock price. THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE BECAUSE OF DELAYS IN THE INTRODUCTION OF OUR PRODUCTS, OR IF THERE ARE SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE HARMED. For the three months ended March 31, 2002, our net income was $1.5 million. We have incurred significant net losses in recent periods, including a net loss of $46.3 million for the year ended December 31, 2001. Our losses stem partly from the significant costs we incur to develop our entertainment software products. Moreover, a significant portion of our operating expenses is relatively fixed, with planned expenditures based largely on sales forecasts. At the same time, most of our products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year. Relatively fixed costs and short windows in which to earn revenues mean that sales of new products are important in enabling us to recover our development costs, to fund operations and to replace declining net revenues from older products. Our failure to accurately assess the commercial success of our new products, and our delays in releasing new products, could reduce our net revenues and our ability to recoup development and operational costs. OUR GROWING DEPENDENCE ON REVENUES FROM GAME CONSOLE SOFTWARE PRODUCTS INCREASES OUR EXPOSURE TO SEASONAL FLUCTUATIONS IN THE PURCHASES OF GAME CONSOLES. The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season. As a result, our net revenues, gross profits and operating income have historically been highest during the second half of the year. The impact of this seasonality will increase as we rely more heavily on game console net revenues in the future. Seasonal fluctuations in revenues from game console products may cause material harm to our business and financial results. IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE HARMED SIGNIFICANTLY. Consumer preferences for interactive entertainment software are always changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved continued market acceptance. Instead, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in our industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. We expect the importance of introducing hit titles to increase in the future. We cannot assure you that our new products will achieve significant market acceptance, or that we will be able to sustain this acceptance for a significant length of time if we achieve it. Page 26 We believe that our future revenue will continue to depend on the successful production of hit titles on a continuous basis. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of these products to achieve market acceptance could cause material harm to our business. Further, if our products do not achieve market acceptance, we could be forced to accept substantial product returns or grant significant pricing concessions to maintain our relationship with retailers and our access to distribution channels. If we are forced to accept significant product returns or grant significant pricing concessions, our business and financial results could suffer material harm. OUR RELIANCE ON THIRD PARTY SOFTWARE DEVELOPERS SUBJECTS US TO THE RISKS THAT THESE DEVELOPERS WILL NOT SUPPLY US WITH HIGH QUALITY PRODUCTS IN A TIMELY MANNER OR ON ACCEPTABLE TERMS. Third party interactive entertainment software developers develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks: o limited financial resources may force developers out of business prior to their completion of projects for us or require us to fund additional costs; and o the possibility that developers could demand that we renegotiate our arrangements with them to include new terms less favorable to us. Increased competition for skilled third party software developers also has compelled us to agree to make advance payments on royalties and to guarantee minimum royalty payments to intellectual property licensors and game developers. Moreover, if the products subject to these arrangements, are not delivered timely, or with acceptable quality, or do not generate sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR BUSINESS MAY BE HARMED. The interactive entertainment software industry is subject to rapid technological change. New technologies could render our current products or products in development obsolete or unmarketable. Some of these new technologies include: o operating systems such as Microsoft Windows XP; o technologies that support games with multi-player and online features; o new media formats such as online delivery and digital video disks, or DVDs; and o recent releases of new video game consoles such as the Sony Playstation 2, the Nintendo Gamecube and the Microsoft Xbox. We must continually anticipate and assess the emergence of, and market acceptance of, new interactive entertainment software platforms well in advance of the time the platform is introduced to consumers. Because product development cycles are difficult to predict, we must make substantial product development and other investments in a particular platform well in advance of introduction of the platform. If the platforms for which we develop new software products or modify existing products are not released on a timely basis or do not attain significant market penetration, or if we develop products for a delayed or unsuccessful platform, our business and financial results could suffer material harm. New interactive entertainment software platforms and technologies also may undermine demand for products based on older technologies. Our success will depend in part on our ability to adapt our products to those emerging game platforms that gain widespread consumer acceptance. Our business and financial results may suffer material harm if we fail to: o anticipate future technologies and platforms and the rate of market penetration of those technologies and platforms; o obtain licenses to develop products for those platforms on favorable terms; or o create software for those new platforms on a timely basis. WE COMPETE WITH A NUMBER OF COMPANIES THAT HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND PRODUCT DEVELOPMENT RESOURCES THAN WE DO. The interactive entertainment software industry is intensely competitive and new interactive entertainment software programs and platforms are regularly introduced. The greater resources of our competitors permit them to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and pay higher fees than we Page 27 can to licensors of desirable motion picture, television, sports and character properties and to third party software developers. We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant competitors include Electronic Arts Inc., Activision, Inc., and Vivendi Universal Interactive Publishing. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Competitors with more extensive customer bases, broader customer relationships and broader industry alliances may be able to use such resources to their advantage in competitive situations, including establishing relationships with many of our current and potential customers. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete directly with us in the development of software titles for their respective platforms and they have generally discretionary approval authority over the products we develop for their platforms. Large diversified entertainment companies, such as The Walt Disney Company, many of which own substantial libraries of available content and have substantially greater financial resources, may decide to compete directly with us or to enter into exclusive relationships with our competitors. We also believe that the overall growth in the use of the Internet and online services by consumers may pose a competitive threat if customers and potential customers spend less of their available home personal computing time using interactive entertainment software and more time using the Internet and online services. WE MAY FACE DIFFICULTY IN OBTAINING ACCESS TO RETAILERS NECESSARY TO MARKET AND SELL OUR PRODUCTS EFFECTIVELY. Retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer software producers, and in particular producers of interactive entertainment software products, for high quality retail shelf space and promotional support from retailers. To the extent that the number of consumer software products and computer platforms increases, competition for shelf space may intensify and require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an improving position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer's sales volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. A prolonged failure in this regard may cause material harm to our business. We currently sell our products to retailers through external distribution partners and co-publishing deals. We also derive revenues from licensing of our products to hardware companies (or OEM), selling subscriptions on our online gaming services, selling advertisements on our online web pages and selling our packaged goods through our online store. The loss of, or significant reduction in sales to, any of our principal distributors could cause material harm to our business. OUR CUSTOMERS HAVE THE ABILITY TO RETURN OUR PRODUCTS OR TO RECEIVE PRICING CONCESSIONS AND SUCH RETURNS AND CONCESSIONS COULD REDUCE OUR NET REVENUES AND RESULTS OF OPERATIONS. We are exposed to the risk of product returns and pricing concessions with respect to our distributors and retailers. We allow distributors and retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. In addition, we provide pricing concessions to our customers to manage our customers' inventory levels in the distribution channel. We could be forced to accept substantial product returns and provide pricing concessions to maintain our relationships with retailers and our access to distribution channels. Product return and pricing concessions that exceed our reserves have caused material harm to our results of operations in the recent past and may do so again in the future. SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS MAY REDUCE THE PRICE OF OUR STOCK AND DILUTE EXISTING STOCKHOLDERS. We have filed registration statements covering a total of approximately 53 million shares of our common stock for the benefit of those shareholders. Assuming the effectiveness of these registration statements, these shares would be eligible for immediate resale in the public market. Included in these registrations are shares of common stock Page 28 owned by Universal Studios, Inc. (now owned by Vivendi), which beneficially owns approximately 5% of our common stock, Titus Interactive S.A., which beneficially owns approximately 72% of our common stock, and investors that acquired shares of common stock in our April 2001 financing. Future sales of common stock by these holders could substantially increase the volume of shares being publicly traded and could decrease the trading price of our common stock and, therefore, the price at which you could resell your shares. A lower market price for our shares also might impair our ability to raise additional capital through the sale of our equity securities. Any future sales of our stock would also dilute existing stockholders. WE DEPEND UPON THIRD PARTY LICENSES OF CONTENT FOR MANY OF OUR PRODUCTS. Many of our current and planned products, such as our Star Trek, Advanced Dungeons and Dragons and Caesars Palace titles, are lines based on original ideas or intellectual properties licensed from other parties. From time to time we may not be in compliance with certain terms of these license agreements, and our ability to market products based on these licenses may be negatively impacted. Moreover, disputes regarding these license agreements may also negatively impact our ability to market products based on these licenses. Additionally, we may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. If we are unable to maintain current licenses or obtain new licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release products without the desired underlying content, either of which could limit our commercial success and cause material harm to our business. WE MAY FAIL TO MAINTAIN EXISTING LICENSES, OR OBTAIN NEW LICENSES FROM HARDWARE COMPANIES ON ACCEPTABLE TERMS OR TO OBTAIN RENEWALS OF EXISTING OR FUTURE LICENSES FROM LICENSORS. We are required to obtain a license to develop and distribute software for each of the video game console platforms for which we develop products, including a separate license for each of North America, Japan and Europe. We have obtained licenses to develop software for the Sony PlayStation and PlayStation 2, as well as video game platforms from Nintendo and Microsoft. In addition, each of these companies has the right to approve the technical functionality and content of our products for their platforms prior to distribution. Due to the competitive nature of the approval process, we must make significant product development expenditures on a particular product prior to the time we seek these approvals. Our inability to obtain these approvals could cause material harm to our business. OUR SALES VOLUME AND THE SUCCESS OF OUR PRODUCTS DEPENDS IN PART UPON THE NUMBER OF PRODUCT TITLES DISTRIBUTED BY HARDWARE COMPANIES FOR USE WITH THEIR VIDEO GAME PLATFORMS. Even after we have obtained licenses to develop and distribute software, we depend upon hardware companies such as Sony Computer Entertainment, Nintendo and Microsoft, or their designated licensees, to manufacture the CD-ROM or DVD-ROM media discs that contain our software. These discs are then run on the companies' video game consoles. This process subjects us to the following risks: o we are required to submit and pay for minimum numbers of discs we want produced containing our software, regardless of whether these discs are sold, shifting onto us the financial risk associated with poor sales of the software developed by us; and o reorders of discs are expensive, reducing the gross margin we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs. As a result, video game console hardware licensors can shift onto us the risk that if actual retailer and consumer demand for our interactive entertainment software differs from our forecasts, we must either bear the loss from overproduction or the lower per-unit revenues associated with producing additional discs. Either situation could lead to material reductions in our net revenues. WE HAVE A LIMITED NUMBER OF KEY PERSONNEL. THE LOSS OF ANY SINGLE KEY PERSON OR THE FAILURE TO HIRE AND INTEGRATE CAPABLE NEW KEY PERSONNEL COULD HARM OUR BUSINESS. Our interactive entertainment software requires extensive time and creative effort to produce and market. The production of this software is closely tied to the continued service of our key product design, development, sales, marketing and management personnel. Our future success also will depend upon our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition for highly skilled employees is intense, and we may fail to attract and retain such personnel. Alternatively, we may Page 29 incur increased costs in order to attract and retain skilled employees. Our failure to retain the services of key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business. OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES, DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES. Our net revenues from international sales accounted for approximately 10 percent and 25 percent of our total net revenues for the three months ended March 31, 2002 and 2001, respectively. Most of these revenues come from our distribution relationship with Virgin, pursuant to which Virgin became the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. To the extent our resources allow, we intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide. Our international sales and operations are subject to a number of inherent risks, including the following: o recessions in foreign economies may reduce purchases of our products; o translating and localizing products for international markets is time- consuming and expensive; o accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect; o regulatory requirements may change unexpectedly; o it is difficult and costly to staff and manage foreign operations; o fluctuations in foreign currency exchange rates; o political and economic instability; o our dependence on Virgin as our exclusive distributor in Europe, the Commonwealth of Independent States, Africa and the Middle East; and o delays in market penetration of new platforms in foreign territories. These factors may cause material declines in our future international net revenues and, consequently, could cause material harm to our business. A significant, continuing risk we face from our international sales and operations stems from currency exchange rate fluctuations. Because we do not engage in currency hedging activities, fluctuations in currency exchange rates have caused significant reductions in our net revenues from international sales and licensing due to the loss in value upon conversion into U.S. Dollars. We may suffer similar losses in the future. INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR DEFENDING OUR PROPRIETARY TECHNOLOGY. We regard our software as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks, and hold the rights to one patent application related to one of our titles. While we provide "shrinkwrap" license agreements or limitations on use with our software, it is uncertain to what extent these agreements and limitations are enforceable. We are aware that some unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, it could cause material harm to our business and financial results. Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies such as the Internet and online services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights may diminish. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies. Page 30 WE MAY UNINTENTIONALLY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH COULD EXPOSE US TO SUBSTANTIAL DAMAGES OR RESTRICT OUR OPERATIONS. As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following: o cease selling, incorporating or using products or services that incorporate the challenged intellectual property; o obtain a license from the holder of the infringed intellectual property, which license, if available at all, may not be available on commercially favorable terms; or o redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results. OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS. Legislation is periodically introduced at the state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content of interactive entertainment software. We believe that mandatory government-run rating systems eventually will be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products to comply with new regulations, which could delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock some of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business. WE MAY FAIL TO IMPLEMENT INTERNET-BASED PRODUCT OFFERINGS SUCCESSFULLY. We seek to establish an online presence by creating and supporting sites on the Internet and by offering our products through these sites. Our ability to establish an online presence and to offer online products successfully depends on: o increases in the Internet's data transmission capability; o growth in an online market sizeable enough to make commercial transactions profitable. Because global commerce and the exchange of information on the Internet and other open networks are relatively new and evolving, a viable commercial marketplace on the Internet may not emerge and complementary products for providing and carrying Internet traffic and commerce may not be developed. Even with the proper infrastructure, we may fail to develop a profitable online presence or to generate any significant revenue from online product offerings in the near future, or at all. If the Internet does not become a viable commercial marketplace, or if this development occurs but is insufficient to meet our needs or if such development is delayed beyond the point where we plan to have established an online service, our business and financial condition could suffer material harm. Page 31 SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT OUR ABILITY TO RECEIVE A PREMIUM PRICE FOR YOUR SHARES. Our Board of Directors has the authority, without any action by the stockholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. In addition, our certificate of incorporation and bylaws contain provisions that: o eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and o require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock has previously fluctuated and could continue to fluctuate in response to factors that are largely beyond our control, and which may not be directly related to the actual operating performance of our business, including: o general conditions in the computer, software, entertainment, media or electronics industries; o changes in earnings estimates or buy/sell recommendations by analysts; o investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; and o price and trading volume volatility of the broader public markets, particularly the high technology sections of the market. WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK. We have not paid any cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of March 31, 2002. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with interest rate fluctuations on any revolving line of credit agreement we maintain, and the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations. INTEREST RATE RISK Our interest rate risk is due to our working capital lines of credit typically having an interest rate based on either the bank's prime rate or LIBOR. Currently, we do not have a line of credit, but we anticipate establishing a line of credit in the future. With the consummation of the Shiny sale on April 30, 2002 we retired all of our outstanding interest bearing debt and provided a note payable with an interest rate of 6 percent per annum due in 2003 to a party to the transaction. FOREIGN CURRENCY RISK Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables, primarily from Virgin. We recognized foreign exchange gains of $65,000 and losses of $102,000 during the three months ended March 31, 2002 and 2001, respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable from Virgin. Page 32 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of known routine claims will not have a material adverse effect on the Company's business, financial condition or results of operations. On January 15, 2002, Rage Games Limited ("Rage") filed a breach of contract action against the Company in the Superior Court of California, County of Orange, relating to the August 3, 2000 North American distribution agreement and the February 9, 2001 OEM distribution agreement. In the complaint, Rage alleged that the Company failed to make royalty payments under these agreements. Rage sought damages in the amount of $2.9 million plus interest and punitive damages. Furthermore, Rage sought to audit the Company's books, return all of Rage's software and a cease & desist of all manufacturing & further distribution of Rage's software. The Company settled all claims with Rage in April 2002. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 30, 2002, the Company issued to Warner Bros., a division of Time Warner Entertainment Company, L.P., a Secured Convertible Promissory Note, due April 30, 2003, in the principal amount of $2.0 million. The note was issued in partial payment of amounts due Warner Bros. under the parties' license agreement for the video game based on the motion picture THE MATRIX, which was being developed by a subsidiary of the Company. The note is secured by all of the Company's assets, and may be converted by the holder thereof into shares of the Company's common stock on the maturity date or, to the extent there is any proposed prepayment, within the 30 day period prior to such prepayment. The conversion price is equal to the lower of (a) $0.304 and (b) an amount equal to the average closing price of a share of the Company's common stock for the five business days ending on the day prior to the conversion date, provided that in no event can the note be converted into more than 18,600,000 shares. If any amount remains due following conversion of the note into 18,600,000 shares, the remaining amount will be payable in cash. Interplay agreed to register with the Securities and Exchange Commission the resale by the note holder of shares of common stock issued upon conversion of the note. In connection with the sale of these securities, Warner Bros. represented to the Company that it was an accredited investor with the meaning of the Securities Act and that it was acquiring the securities for investment purposes only. The issuance and sale of these securities was exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The following exhibits are filed as part of this report: EXHIBIT NUMBER EXHIBIT TITLE 2.1 Stock Purchase Agreement by and between Infogrames, Inc., Shiny Entertainment Inc., David Perry, Shiny Group, Inc., and Interplay Entertainment Corp. dated April 23, 2002; incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-K filed May 6, 2002. 2.2 Amendment Number 1 to the Stock Purchase Agreement by and between Interplay Entertainment Corp., Infogrames, Inc., Shiny Entertainment, Inc., David Perry, and Shiny Group, Inc. dated April 30, 2002; incorporated herein by reference to Exhibit 2.2 to the Company's Form 8-K filed May 6, 2002. 10.1 Letter Agreement and Amendment Number 4 to Distribution Agreement by and between Vivendi Universal Games, Inc. and Interplay Entertainment Corp. dated January 18, 2002. 10.2 Fourth Amendment To Computer License Agreement by and between Interplay Entertainment Corp. and Infogrames Interactive, Inc. dated January 23, 2002. (Portions omitted pursuant to request for confidential treatment.) Page 33 10.3 Amendment Number Four to the Product Agreement by and between Interplay Entertainment Corp., Infogrames Interactive, Inc., and Bioware Corp. dated January 24, 2002. 10.4 Amended and Restated Amendment Number 1 to Product Agreement by and between Interplay Entertainment Corp. and High Voltage Software, Inc. dated March 5, 2002. (Portions omitted pursuant to request for confidential treatment.) 10.5 Forbearance Agreement by and between LaSalle Business Credit, Inc., Brian Fargo, Shiny Entertainment, Inc., Interplay Entertainment Corp., Interplay OEM, Inc., and Gamesonline.com, Inc. dated March 13, 2002. 10.6 Settlement Agreement and Release by and between Brian Fargo, Interplay Entertainment Corp., Interplay OEM, Inc., Gamesonline.com, Inc., Shiny Entertainment, Inc., and Titus Interactive S.A. dated March 13, 2002. 10.7 Agreement by and between Vivendi Universal Games Inc., Interplay Entertainment Corp., and Shiny Entertainment, Inc. dated April of 2002. 10.8 Term Sheet by and between Titus Interactive S.A., and Interplay Entertainment Corp. dated April 26, 2002. 10.9 Promissory Note by Titus Interactive S.A. in favor of Interplay Entertainment Corp. dated April 26, 2002. 10.10 Amended and Restated Secured Convertible Promissory Note, dated April 30, 2002, in favor of Warner Bros., a division of Time Warner Entertainment Company, L.P. (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K on January 28, 2002, reporting the resignation of Brian Fargo as a director and executive officer of the Company, and the appointment of Herve Caen as interim Chief Executive Officer. The Company filed a Current Report on Form 8-K on January 28, 2002, reporting that the Company and Bioware Corp. had entered into a settlement of their legal dispute. The Company filed a Current Report on Form 8-K on February 21, 2002, reporting that the Company had received a deficiency letter from the Nasdaq Stock Market informing the Company of its failure to comply with the minimum requirements for continued listing on the Nasdaq National Market. Page 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERPLAY ENTERTAINMENT CORP. Date: May 15, 2002 By: /S/ HERVE CAEN ----------------------------- Herve Caen, President (Principal Executive Officer) Date: May 15, 2002 By: /S/ JEFF GONZALEZ ---------------------------- Jeff Gonzalez Chief Financial Officer (Principal Financial and Accounting Officer) Page 35 EX-10 3 exhibit10-1.txt EXHIBIT 10.1 January 18, 2002 Mr. Herve Caen President Interplay Entertainment, Corp. 16815 Von Karman Avenue lrvine, CA 92606 Re: LETTER AGREEMENT AND AMENDMENT # 4 TO DISTRIBUTION AGREEMENT Dear Mr. Caen: This letter will serve to confirm the agreements we have reached in connection with the Distribution Agreement dated August 23, 2001, between Vivendi Universal Games, Inc., formerly known as Vivendi Universal Interactive Publishing North America, Inc. ("Universal") and Interplay Entertainment Corp. ("Interplay"), as amended by Amendment #1 to Distribution Agreement, dated September 14, 2001 ("Amendment #1"), Secured Advance and Amendment#2 ("Amendment #2") executed in November, 2001, and Secured Advance and Amendment #3("Amendment #3") dated December 13, 2001 (the "Distribution Agreement"). All capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the Distribution Agreement. 1. Section 6.4 of the Distribution Agreement is hereby amended to state in its entirety: RECOUPMENT OF ADVANCE. "Thc Advance shall be recoupable by UNIVERSAL as follows: UNIVERSAL shall be entitled to deduct from Interplay Proceeds otherwise payable to Interplay with respect to each unit of Product distributed by Universal an amount equal to the sum of (i) 20% of the Interplay Proceeds; and (ii) 5% of the Price after deducting the General Reserve. Notwithstanding the foregoing, Interplay shall have the right at any time during the term to return, repay or otherwise reimburse UNIVERSAL the Advance without penalty of any kind whatsoever. 2. In light of the changes made pursuant to the preceding paragraph, within twenty-four hours after the complete execution of this letter agreement, Universal will pay Interplay $1.1 million in Interplay Proceeds. This amount represents Universal's best estimate of the additional Interplay Proceeds to which Interplay would be entitled had the change reflected in the preceding paragraph been made as of August 23, 2001. 3. Notwithstanding the provisions of Amendment #2 and Amendment #3, as to 50% of the New Advance and Second New Advance, Universal shall not exercise its right to recoup such 50% unless and until Interplay has received $2.5 million in Interplay Proceeds in any given month; provided, however, if by September 30, 2002, Interplay has not received $2.5 million in Interplay Proceeds in any given month, then the preceding clause shall be disregarded and Universal shall, beginning October 1, 2002, be entitled to recoup such 50% of the New Advance and Second New Advance in accordance with the terms of Amendment #2 and Amendment #3. The other 50% of the New Advance and Second New Advance shall at all times be fully recoupable in accordance with Amendment #2 and Amendment #3. 4. In light of the changes made pursuant the preceding paragraph, upon execution of this letter agreement, Universal shall pay to Interplay $1.75 million, which represents 50% of the New Advance and Second New Advance (i.e., $3.5 million being the amount estimated to have been recouped by Universal as a result of sales through December 31, 2001). 5. Exhibit A to the Distribution Agreement is hereby replaced with the document titled "Amended Exhibit A" attached to this letter agreement as Exhibit A. 6. Concurrent with executing this letter agreement, Interplay and Universal will enter into a Trademark Purchase and Sale Agreement substantially in the form of Exhibit B. 7. Interplay and Universal shall, and shall cause their controlling shareholders, directors, officers, employees, independent contractors, legal representatives and financial advisors, and affiliates (and such affiliates' controlling shareholders, directors, officers, employees, independent contractors, legal representatives and financial advisors) to keep the terms of this letter agreement, the Distribution Agreement, Amendment #l, Amendment #2, and Amendment #3 and all negotiations, discussions, documents, drafts, email communications and other correspondence and documentation relating thereto confidential and not to disclose such information to third parties who do not need the information in order for Interplay or Universal, as the case may be, to enforce its rights or perform its obligations under the Distribution Agreement, Amendment #1, Amendment #2, Amendment #3 or this letter agreement, except to the extent that any such person or entity may be advised in writing by counsel that he, she or it is required by law to disclose the same. 8. In connection with the Notice of First Breach, Notice of Second Breach, Notice of Third Breach and Notice of Fourth Breach, each dated January 4, 2002, and the Notice of Fifth Breach dated on or about January 10, 2002, and sent to Universal by Interplay with respect to the Distribution Agreement, by executing this letter, Interplay agrees as follows: a. Interplay hereby withdraws the Notice of First Breach, Notice of Second Breach and Notice of Fifth Breach and acknowledges and agrees that as a result of this withdrawal, Universal shall not be deemed to have been in breach of the Distribution Agreement at any time up to and including the date of this letter agreement, particularly, but without limitation, to the extent that Interplay subsequently claims that Universal failed to cure any alleged breach within the time period specified in a Notice of Breach. b. Interplay hereby withdraws the Notice of Third Breach and Notice of Fourth Breach and agrees that the conduct complained of therein does not constitute, and at no time has constituted, a breach of the Distribution Agreement. c. Interplay acknowledges and agrees that as a result of its withdrawal of the Notices of Breach referenced herein, Universal shall not be deemed to have been in breach of the Distribution Agreement at any time up to and including the date of this letter agreement. Page 2 9. Subject to the next sentence, the Distribution Fee provided for in Section 6.2 of the Distribution Agreement shall be increased to 20% in the event that, and for so long as, Interplay fails to deliver a final, approved gold master of any of the Products listed below by the dates indicated below, together with the English text of the manual for such product for use in the packaging of such Products. Notwithstanding the preceding sentence, Interplay may elect to deliver gold masters of one of the four Products below up to 30 days late without triggering the increase in the Distribution Fee described above; provided that Interplay gives Universal written notice no less than one week before receipt of the next scheduled royalty report of which product such late product will be. Run Like Hell. August 15, 2002 Hunter August 15, 2002 Icewind Dale May 15, 2002 Matrix 45 days before the commercial release in the United States of the Matrix II movie. 10. With respect to Section 5.1 of Amendment #3, Universal's distribution rights in Australia shall take effect no later than April 1, 2002. 11. Commencing immediately upon complete execution of this letter agreement, Universal and Interplay shall prepare an amended and restated version of the Distribution Agreement which is mutually satisfactory to both parties and reflects the terms of this letter agreement and the Distribution Agreement as previously amended. Specifically, such amended and restated version of the Distribution Agreement shall state the understanding of both parties that the minimum royalty set forth in Amendment #1 shall not apply to any Product which was first commercially released in the United States on or before August 23, 2001. The parties shall use their best efforts to complete the amended and restated version by January 23 and in no event later than January 31, 2002. 12. Universal reserves all rights and remedies under the Distribution Agreement (as amended). In particular, but without limitation, Universal expressly reserves its right to recover through any means (including by way of offset of amounts otherwise payable to Interplay under the Agreement) all sums paid to Interplay pursuant to this letter agreement. If you agree to the provisions set forth in this letter agreement, please so indicate by signing the enclosed copy and returning it to me via facsimile, followed by an original copy in the mail. Sincerely yours, /s/ Edward Zinser Edward Zinser Chief Financial Officer Vivendi Universal Games, Inc [Signature page follows.] Page 3 I agree to the provisions of this letter agreement. Dated: January 18, 2002 /s/ Herve Caen ---------------------------------------- Herve Caen, President and Board Executive Committee member of Interplay Entertainment Corp. Page 4 EX-10 4 exhibit10-2.txt EXHIBIT 10.2 FOURTH AMENDMENT TO COMPUTER LICENSE AGREEMENT This Fourth Amendment to Computer License Agreement ("FOURTH AMENDMENT") is entered into as of January 23, 2002 by Interplay Entertainment Corp., a Delaware corporation, as successor in interest to Interplay Productions, Inc. ("LICENSEE"), and Infogrames Interactive, Inc. a Delaware corporation, as successor in interest to TSR, Inc. ("LICENSOR"), and collectively the "PARTIES". RECITALS A. Licensor and Licensee entered into that certain Computer Game License Agreement dated as of August 8, 1994 as amended (the "ORIGINAL AGREEMENT") for the purpose of licensing certain intellectual property to Licensee and the development of interactive entertainment software related to such licensed rights. B. The Original Agreement has been amended on or as of August 1, 1996 (the "FIRST AMENDMENT"), March 8, 1998 (the "SECOND AMENDMENT") and July 25, 2001 (the "THIRD AMENDMENT"). C. The Original Agreement, as amended by the First, Second and Third Amendments, is hereinafter referred to as the "AGREEMENT". D. A dispute has arisen with respect to among other things, the interpretation of Licensed Property pursuant to the 2nd and 3rd Option Terms in the Second Amendment and Licensee's compliance with the Agreement. E. Through this Fourth Amendment, the Parties desire and intend clarify the Agreement and to grant the limited rights specified herein. Accordingly, in consideration of the promises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensee and Licensor, intending to be legally bound, have agreed and do hereby agree as follows: 1. INCORPORATION. This Fourth Amendment is incorporated into and amends the Agreement by this reference. 2. TERMINATION OF "HEADS OF AGREEMENT". Concurrent with the execution of this Fourth Amendment the parties agree that the July 25, 2001 "Heads of Agreement", for the distribution by Infogrames, Inc. ("INFOGRAMES, INC.") of the interactive entertainment software currently known as "Neverwinter Nights" is hereby mutually terminated. Neither Licensor (and/or Infogrames, Inc.), on the one hand, nor Licensee, on the other hand, shall incur any liability in connection with the termination of the Heads of Agreement, and each party represents and warrants that the other party shall not be subject to any further obligations - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 1 (monetary or otherwise) to the other in connection with the Heads of Agreement. For purposes of clarification, all advances and other monies paid to date by LICENSOR to LICENSEE pursuant to the Heads of Agreement shall be deemed non-refundable. 3. LICENSED PROPERTY DEFINED. The definition of LICENSED PROPERTY shall be as follows: For 2ND OPTION TERM and 3RD OPTION TERM, the term LICENSED PROPERTY shall mean the following: An exclusive license to use BALDUR'S GATE as the title of a retail PC and/or home video game product and sequels. A non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the BALDUR'S GATE trademark, the trademarks and copyrighted materials associated with, but not unique to, the PLANESCAPE and FORGOTTEN REALMS fantasy worlds, including without limitation, the ADVANCED DUNGEONS & DRAGONS, AD&D, TSR, TSR Logo, INFOGRAMES INTERATIVE, INC., and Infogrames Logo trademark; provided, however, that Licensee's rights shall be exclusive with respect to computer software games primarily located in the Baldur's Gate area of the Forgotten Realms world. For purposes of clarification, Licensor may develop, manufacture, distribute, promote, license, and sell (and authorize any third party to do so) computer software games based in the Forgotten Realms world allowing players to venture into the Baldur's Gate area. Licensor shall not develop, manufacture, distribute, promote, license, or sell (nor authorize any third party to do so) any computer software game primarily located, based or focused in the Baldur's Gate area. 4. TORMENT. Notwithstanding the foregoing, Licensee shall have six months from the date of this Fourth Amendment to sell off any existing inventory of TORMENT products, and all currently existing contracts covering the exploitation of Torment products shall be entitled to run until the end of their respective terms, but in no event shall any such terms run past December 31, 2002 (except with respect to the Universal Distribution Agreement, as described in Paragraph 8 below, which shall not run beyond December 31, 2003 with respect to TORMENT products; provided, however, that in the event Universal/Vivendi ceases distribution of TORMENT products prior to December 31, 2003, then Interplay's rights thereto shall concurrently terminate). 5. ICEWIND DALE, BALDUR'S GATE DARK ALLIANCE AND NEVERWINTER NIGHTS. For the purposes of clarity and notwithstanding anything to the contrary contained in the Agreement, including this Fourth Amendment, LICENSEE shall have the exclusive right to exploit (i) its previously released "Icewind Dale" PC product and expansion entitled "Icewind Dale - Heart of Winter", (ii) the - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 2 "Icewind Dale 2" PC product currently in development, (iii) "Icewind Dale 3" as a PC product, and (iv) add-on and expansion packs thereto. Further for the purposes of clarity, LICENSEE shall maintain, as part of rights included in the Licensed Property, the exclusive rights to Baldur's Gate Dark Alliance ("BGDA") products during the Term of, and pursuant to the terms and conditions of, the Agreement, including, without limitation, the recently released BGDA video game for the Sony PlayStation 2 platform. Further for the purposes of clarity and notwithstanding anything to the contrary contained in the Agreement, including this Fourth Amendment, LICENSEE shall maintain, pursuant to the terms of the Agreement, the exclusive rights to the NEVERWINTER NIGHTS PC product being developed for LICENOR pursuant to the NWN Agreement described in Paragraph 10 below (the "NWN PC PRODUCT"), in connection with the following agreements only: i. That certain License Agreement dated October 5, 2001, by and between Interplay Licensing & Merchandising, a division of Interplay OEM, Inc. ("INTERPLAY OEM") and Empire 21 Publishing, Inc., a California corporation dba Versus Books ("EMPIRE"), pursuant to the terms of which Empire has the exclusive, worldwide right and license to develop, publish, produce, market and distribute a Game Guide (as defined in the agreement) for the NWN PC Product (the "BOOK AGREEMENT"); and ii. That certain Electronic Distribution Agreement ("STREAMING AGREEMENT") dated as of November 2001, by and between GamesOnline.com,Inc., a Delaware corporation d.b.a. Interplay.com ("GAMESONLINE"), and Knight Bridging Korea Co., Ltd., a company organized in the Republic of Korea ("KBK"), pursuant to the terms of which KBK has the right to create a Korean-localized version of the NWN PC Product and the exclusive right and license to display, operate, engage and sell only the Korean-localized version of the NWN PC Product over the World Wide Web in the form of (i) electronic broadband transmissions commonly known in the interactive software industry as "streaming", and/or (ii) downloadable versions. In connection with the Streaming Agreement, Licensor shall, as soon as reasonably practicable, supply Licensee with a version of the NWN PC Product (and any code and other assets which may be necessary, and as are provided to LICENSOR from the BioWare Corporation (the "NWN ASSETS")) for use by KBK in localizing such product pursuant to the terms and conditions of the Streaming Agreement. Licensor will use its commercially reasonable best efforts to obtain the NWN Assets from BioWare. - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 3 In connection with amounts that would have been paid directly to BioWare by LICENSEE from the Streaming Agreement and the Book Agreement had the Amendment Number Four to and assignment of the NWN Agreement (as defined in Paragraph 10 below) not been entered into, LICENSEE shall supply LICENSOR with accurate, detailed statements and corresponding amounts that would have been due to BioWare from LICENSEE pursuant to the NWN Agreement prior to the Amendment Number Four thereto and assignment thereof. All such statements and payments shall be provided to LICENSOR at least ten business days prior to when such statements and payments would have been due to BioWare from LICENSEE pursuant to the NWN Agreement prior to the Amendment Number Four thereto and assignment thereof, as if LICENSEE had not assigned such NWN Agreement to LICENSOR and was rendering statements and paying BioWare directly. The following language at the end of Section 3.2 of the Third Amendment is hereby deleted in its entirety: "and (2) NEVERWINTER NIGHTS as the title of one retail PC product. For clarity, such rights shall not include the rights to add-ons, expansion packs, derivatives (including sequels) and conversions." 6. TERM. The current Term of the Agreement (the Second Option Term) shall be extended one year, until February 8, 2004 and the Third Option Term (if such option is exercised pursuant to the terms of the Agreement) shall begin on February 8, 2004 and expire on February 8, 2006. 7. CUMULATIVE BREACHES. The last sentence of Paragraph 27 of the Agreement is deleted and replaced with the following: "Notwithstanding the foregoing, if LICENSEE breaches the approval provisions (Paragraph 6) or payment of royalties provision (Paragraph 12) of this Agreement * * * or more times during any * * * year period, regardless of whether the breaches have been cured or waived, LICENSOR may give LICENSEE written warning and, if LICENSEE breaches such provisions again during the * * * year period, LICENSOR may terminate this Agreement immediately by written notice to LICENSEE. As of the date of this Fourth Amendment, LICENSEE shall be deemed to have zero (0) such breaches." 8. UNIVERSAL DISTRIBUTION AGREEMENT. LICENSEE acknowledges and agrees that prior to entering into that certain Distribution Agreement dated August 23, 2001, as amended (collectively, the "UNIVERSAL DISTRIBUTION AGREEMENT"), and with the exception of distribution of the LICENSED PRODUCTS in certain territories by Virgin Interactive on LICENSEE's behalf, LICENSEE substantially distributed the Licensed Products itself and paid Royalties to LICENSOR pursuant to the terms and conditions of this TSR Agreement, including Net Sales as defined in Section 11 of this TSR Agreement. * * * LICENSEE shall pay * * * in connection with the distribution of the Licensed Products. Accordingly, LICENSEE shall use its best efforts * * * . In the event * * *, LICENSEE shall pay LICENSOR * * *. - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 4 9. AUDIT RIGHTS. LICENSEE shall use its commercially reasonable efforts * * * ; provided, however, that Interplay's inability to obtain any/all such agreements shall not be deemed a breach of this Fourth Amendment. 10. AMENDMENT AND ASSIGNMENT OF NWN DEVELOPMENT AGREEMENT. Concurrently with the execution of this Fourth Amendment, LICENSEE, LICENSOR and BIOWARE CORP. shall execute an AMENDMENT NUMBER FOUR (in the form attached hereto as EXHIBIT 1) to that certain PRODUCT AGREEMENT dated as of August 26, 1999, as amended (collectively, the "NWN AGREEMENT"), currently existing between LICENSEE and BIOWARE CORP. respecting the development of a computer game referred to in the NWN Agreement as "Neverwinter Nights 2" and currently referred to as "Neverwinter Nights". As partial consideration for entering into such amendment, * * * shall be deemed to have been paid by LICENSEE to LICENSOR from Royalties currently owed to LICENSOR by LICENSEE pursuant to the Agreement (the "PAYMENT"). The Payment consists of interest due to LICENSOR on the Q4 2000 Royalty payment, as well as Royalty payments for Q1,2 and 3 of 2001, plus interest thereon. 11. MUTUAL RELEASE. With the exception of LICENSOR's right to assert claims for underpayment of Royalties resulting from any audit and as set forth in the last two sentences of this Section 11, both LICENSEE and LICENSOR release each other from any and all claims and liabilities directly relating to the Agreement that are known by the releasing party as of the date of this Fourth Amendment. Notwithstanding anything to the contrary herein, in no event shall any claims asserted by LICENSOR against LICENSEE for (i) underpayment of Royalties resulting from any such audit covering reporting periods prior to the date of the Fourth Amendment and/or (ii) failure, prior to the date of the Fourth Amendment, to obtain approvals pursuant to Paragraph 6 of the Agreement, be deemed a breach of Interplay's Royalty payment obligations and/or approval obligations for purposes of the last sentence of Paragraph 27 of the Agreement (as such provision is amended by Paragraph 7 of this Fourth Amendment); provided, however, that in no event shall LICENSOR be deemed to have waived its approval rights under Paragraph 6 of the Agreement. Notwithstanding anything to the contrary set forth herein, LICENSEE shall indemnify, defend and hold harmless LICENSOR, Infogrames, Inc., their parent entity, affiliates, licensees, officers, directors, employees, successors and assigns from any and all claims, demands, actions, losses, liabilities, costs, expenses, and/or damages of any kind or nature (including but not limited to reasonable attorneys fees) arising out of any action brought by * * * (or its designee) and/or * * * (or its designee) in connection with any claim relating to the NWN PC Product as it relates to the * * *. Any such causes of action are expressly excluded from the release set forth above. 12. GOVERNING LAW. In Paragraph 43 of the Agreement, all references to the "State of Wisconsin" shall be deleted and replaced with the "State of New York". 13. JURISDICTION AND VENUE. Paragraph 44 of the Agreement is hereby deleted in its entirety and replaced with the following: - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 5 "In the event Licensee brings any action against Licensor relating to this Agreement, the venue for any such judicial proceeding shall be exclusively in the state and federal courts located in the County of New York, New York (Manhattan). Licensee hereby submits to the exclusive jurisdiction and venue of such courts in connection with any such action and waives any and all objections to venue and jurisdiction of such courts, and agrees it shall not plead that venue is improper or inconvenient in such courts in connection with any action it brings relating to this Agreement. In the event Licensor brings any action against Licensee relating to this Agreement, the venue for any such judicial proceeding shall be exclusively in the state or federal courts located in Orange County, California. Licensor hereby submits to the exclusive jurisdiction and venue of such courts in connection with any such action and waives any and all objections to the venue and jurisdiction of such courts, and agrees that it shall not plead that venue is improper or inconvenient in such courts in connection with any action Licensor brings relating to this Agreement." 14. MISCELLANEOUS. Except as set forth above, the Agreement as hereby amended shall remain in full force and effect without amendment or modification of any kind. Unless otherwise defined, all capitalized terms shall have the meanings ascribed to them in the Agreement. The headings used in this Fourth Amendment are inserted for reference purposes only and do not affect the interpretation of the terms and conditions hereof. This Fourth Amendment may be signed in counterparts and by facsimile, and each counterpart shall be deemed an original. [SIGNATURES COMMENCE ON THE FOLLOWING PAGE] - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 6 In witness whereof, the parties have executed this Fourth Amendment as of the date first above written. "LICENSEE" "LICENSOR" Interplay Entertainment Corp. Infogrames Interactive, Inc. By: /S/ HERVE CAEN By: /S/ HARRY RUBIN ------------------------- ------------------------------- Herve Caen Harry Rubin President Senior Executive Vice President Infogrames, Inc. By: /S/ HARRY RUBIN ------------------------------- Harry Rubin Senior Executive Vice President - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 7 Exhibit 1 Amendment Number Four to Product Agreement - --------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 8 EX-10 5 exhibit10-3.txt EXHIBIT 10.3 AMENDMENT NUMBER FOUR TO THE PRODUCT AGREEMENT This AMENDMENT NUMBER FOUR TO, THE PRODUCT AGREEMENT ("AMENDMENT NUMBER FOUR") is effective this 24th day of January, 2002, by and between and among INTERPLAY ENTERTAINMENT CORP. ("INTERPLAY"), INFOGRAMES INTERACTIVE, INC. ("INFOGRAMES") and BIOWARE CORP. ("DEVELOPER"). 1. Reference is made to the Product Agreement between Interplay and Developer dated as of February 26, 1999 (the "Agreement"), as amended, in connection with the development of the computer game known as "Neverwinter Nights 2" (the "Product"). Notwithstanding any prior statements by Developer, the Agreement is in full force and effect as of the date hereof and has never been terminated. This agreement, when fully executed, shall constitute the further agreement between and among Interplay, Infogrames and Developer with respect to such Agreement, each party having hereby acknowledged thc good, valuable and sufficient consideration exchanged in connection therewith. 2. Interplay hereby assigns the Agreement to Infogrames, including all of its past, current and future rights and obligations pursuant to the Agreement, including all intellectual property rights in and to the Product it has acquired pursuant to the Agreement. Infogrames hereby assumes all of such rights and agrees to perform such obligations, and Developer contents to such assignment. It is expressly understood and agreed to between the parties that pursuant to this Amendment Number Four, Interplay, its parent, affiliated and subsidiary corporations, divisions, present and former stockholders, directors, officers, employees, agents, and attorneys (collectively, the "INTERPLAY Parties"), shall have no further past, current or future rights, obligations and liabilities, known or unknown, pursuant to or arising in connection with the Agreement. Developer, Infogrames, Interplay and the Interplay Parties release, remise, relieve and forever discharge each other, and each of their parent affiliated and subsidiary corporations, divisions, present and former stockholders, director, officers, employees, agents, and attorneys from all claims, demands, actions, causes of action, liabilities, demands and/or law suits, in law or in equity, of every kind and nature, known or unknown, regardless of when occurred, arising out of or resulting from the Agreement (collectively, the "Released Claims"), which Developer, Interplay, the Interplay Parties and Infogrames now have and/or have had against any of the forgoing entities, whether heretofore in dispute or known or unknown, suspected or unsuspected. In addition, Developer, Interplay and the Interplay Parties release each other from any and all Released Claims such parties may in the future have against each other. Developer represents and warrants to Infogrames and Interplay and the Interplay Parties represent and warrant to Developer and Infogrames that neither has conveyed, assigned to any third party, or otherwise encumbered any of their claims and/or rights under the Agreement and that all intellectual property rights in and to the Product and all elements thereof are owned by either Developer or Interplay, as set forth in the Agreement, and that neither party has assigned or encumbered any such intellectual property. Without limiting the generality of the foregoing, Interplay, the Interplay Parties, Developer and Infogrames each acknowledge its awareness of, and do hereby waive the provisions of Section 1542 of the Civil Code of the State of California which reads as follows: Page 1 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 3. Notwithstanding, and in lieu of, anything to the contrary expressed or implied in the Agreement, the Final Delivery Date of the Product shall be April 30, 2002. 4. Paragraph 2 of the Agreement ("Consideration") is hereby amended to include the following additional provisions: "2.03 Infogrames shall make compensation payments to BioWare to the extent required by section C(5) of Schedule A attached hereto. 2.04 It is agreed that timely payment by Infogrames of royalty advance payments, royalty payments and compensation payments pursuant, to Sections 2.01, 2.02 and 2.03 shall be considered a material term of the Agreement for purposes of the termination for cause provisions set forth therein." 5. Paragraph 4.02 of the Agreement is hereby amended to include the following additional sentence afar the first sentence of that paragraph: "In addition, Developer's logo shall be on the front of the package. In addition, Infogrames shall use commercially reasonable efforts to give Developer credit in key materials used for the promotion, advertising and marketing of the Product where providing such credit h practical." 6. Paragraph 4.03 of the Agreement is hereby amended to include the following additional provisions: "Infogrames' marketing of the Product shall be consistent with industry standards generally applicable to first-class or so called `AAA' PC CD-ROM role playing game entertainment software products, including that the spend obligation shall be a minimum of $600,000 and shall be unconditional, commensurate with an `AAA' title. In connection with the foregoing, Infogrames will prepare a marketing plan for the Product and review such plan with Developer." 7. Paragraph 4.04 of the Agreement is hereby amended to change the planned release date to May 15, 2002 and the reference to ninety (90) days is hereby changed to forty five (45) days. This section shall only apply to the English language version of the Product. 8. Paragraph 5.01 is amended to include the following: "Developer hereby represents and warrants that it is duly licensed, or will be duly licensed by the time any such third party materials are used in the Product, to use the third party materials included in the definition of the Developer Properties and that inclusion of such materials in the Product and Infogrames' exploitation of the Product shall not subject Infogrames or its customers to any liability to any such third party." 9. Paragraph 5.03 of the Agreement is hereby deleted in its entirety. Page 2 10. Paragraph 6.01 of the Agreement is hereby deleted in its entirety and replaced with the following: "Developer hereby agrees to indemnify and hold harmless Infogrames from any and all claims, suits, judgments, costs, expenses (including costs of suit and reasonable attorney's fees) and damages (collectively, the "Claims"), on an as incurred basis, as a result of Developer's breach of any of Developer's representations, warranties, and agreements herein made, provided, however, that Developer shall have been provided with prompt written notice of the assertion of any such claim and that Developer shall have the authority and power to control the defense and/or settlement thereof, subject to the right of Infogrames to participate in any such proceeding at its own expense with counsel of its own choosing. Infogrames shall not agree to the settlement of any such claim, action or proceeding without the prior written consent of Developer, which written consent shall not be unreasonably withheld. As used in this paragraph 6.01, "Infogrames" shall also include the officers, directors, agents and employees of Infogrames, or any of its subsidiaries or affiliates." It is expressly understood and acknowledged between Infogrames and Interplay that in connection with Interplay's use of streaming/download rights in the Product in Korea and cluebook rights in the Product, Infogrames makes the same representations, warranties and indemnifications to Interplay that BioWare provides to Infogrames pursuant to the Agreement. 11. Paragraph 7.02 of the Agreement is hereby deleted in its entirety and replaced with the following: "In the event a breach under section 7.01 above shall occur, except as otherwise provided in and subject to Schedule A, Paragraph C, subsection (3), Infogrames shall have the right upon a thirty (30) day written notice to Developer to terminate this Agreement unless Developer has cured the breach within the thirty (30) day cure period. In the event of termination pursuant to this paragraph, Infogrames shall have all right and title to the Deliverables (except for title in the Developer Properties), as defined in Schedule A, Paragraph A, subsection (2), developed up to and including the date of termination. In addition to the Deliverables already delivered to Infogrames of the date of termination, Developer shall provide Infogrames with all Developer Properties existing as of the date of termination as needed by Infogrames to complete the development of the Product as provided for by the terms and conditions of the Agreement. In the event any Developer Properties are used in the final version of the Product, Infogrames shall pay Developer the royalty amount as specified in Schedule A, Paragraph E." 12. Paragraph 8.02 of the Agreement is hereby amended to include the following: "In the event a breach under section 8.01 above shall occur, Developer shall have the right upon a thirty (30) day written notice to Infogrames to terminate this Agreement unless Infogrames has cured the breach within the thirty (30) day period." 13. Paragraph 9.01 of the Agreement is hereby deleted in its entirety and replaced with the following: "The Developer understands that changes in circumstances may require that Infogrames terminate this Agreement before all milestones are completed. In the event of a termination pursuant to this paragraph, it is agreed that Infogrames shall forfeit all right and title to the Deliverables, as defined in Schedule A, Paragraph A, subsection (2), and may make no use of said Deliverables or any other material defined herein as the exclusive property of the Developer, either in whole or in part. It is further agreed that the damages to Developer as a result of termination pursuant to this paragraph are not readily ascertainable at the time of execution of this Agreement and, as such, the parties agree that Developer shall retain all Page 3 payments, including milestone paymenus, royalty advances (if any) and other payments made pursuant to this Agreement as liquidated damages. Notwithstanding anything to the contrary contained herein, and subject to Paragraph 1.02(f) of the Agreement, Infogrames shall retain all rights in and to Infogrames' intellectual property which may be contained in the Deliverables. Developer shall be precluded from using any such intellectual property without the prior written permission of Infogrames." 14. Paragraph 9.02 of the Agreement is hereby deleted and Paragraph 9.03 of the Agreement is hereby amended to include only the following sections as surviving the termination or expiration of the Agreement: 1.01, 1.02, 1.05, 2, 4.01, 4.02, 4.03, 4.05, 5, 6, 7.02, 8.02, 8.03, 9.03, 10, 11.03, 11.04. 11.05, 11.06, 11.07, 11.08, Schedule A, subsection C(5), Schedule A, subsection E and Schedule B. 15. Paragraph 10.01 of the Agreement relating to notice to Developer is hereby amended to include the following in the section "WITH A COPY TO:" "DORSEY & WHITNEY LLP Center Tower, 650 Town Center Drive Suite 1850 P.O. Box 5066 Costa Mesa, California 92626-1925 ATTN: Paul Tauter" In addition, any notices sent to Interplay and/or Infogrames shall be sent to: INFOGRAMES INTERACTIVE, INC. 417 Fifth Avenue New York, NY 10016 Attn: General Counsel 16. Paragraph 11.01 of the Agreement is hereby amended to include the following sentence: "Sublicenses covering substantially all distribution rights of the Product in each of the following countries shall be subject to the prior written approval of Developer, not to be unreasonably withheld: the United States, Canada, England, France, Germany, Australia, Sweden, Norway, Denmark and Korea. Sublicenses shall not include any agreements between Infogrames and any of its related entities. All agreements entered into by Infogrames with its related entities shall be at arms length and royalty payments shall be made by Infogrames to Developer as if Infogrames were the distributor of the Product, and not the related entity." 17. The minimum system requirements set forth in Schedule A paragraph A(1) is hereby amended to read: "P2-300, 16meg 3D Video card (e.g. TNT II), 8X CD-ROM drive and 96 Megs RAM." 18. Paragraph C(5) of Schedule A is hereby deleted in its entirety and replaced with the following: "In the event Infogrames provides development services or content (other than Quality Assurance Testing, localization of assets but not compilation or integration of assets, sound effects, music and marketing for which Infogrames shall pay all costs and not recoup against royalties due to Developer subject to the provisions of Section 4.04) to the Product (in Page 4 addition to such services or content required of Infogrames as more fully set forth in the Design Document for the Product), then the cost and expense incurred by Infogrames shall be treated as an advance which will be recoupable against royalties payable to the Developer hereunder. Notwithstanding the foregoing, Infogrames shall pay all costs for audio creation (but not integration) up to $300,000, Infogrames' localization of assets, QA testing undertaken by Infogrames, and marketing and publicity undertaken by Infogrames, all of which shall be nonrecoupable against royalties due to Developer." 19. Without limiting the generality of anything contained in Schedule A, Section C, Paragraph 5 of the Agreement, the parties expressly understand and agree that: (a) Developer shall perform, or have third parties perform on its behalf, all audio work with respect to the Product, including all audio creation and integration, and Infogrames shall pay Developer's actual reasonable costs up to Three Hundred Thousand Dollars ($300,000) in connection with any such audio creation, at a rate not to exceed $40 USD per sound for Developer created sounds, and at cost for third party created sounds, it being further understood and agreed that no other amounts shall be due from Infogrames to Developer in connection with the development and localization of the Product, excepting that Infogrames shall be responsible for those costs it is listed as being responsible for in Sections 19(b), (d) and (e) below. Infogrames agrees that any such payments by Infogrames shall be non-recoupable against royalties due to Developer. Any such payments shall be due within thirty (30) days of invoicing. (b) In addition, at its sole cost and expense, Developer shall provide Infogrames with all text and audio assets necessary for the localization of the Product, and Infogrames, at its sole cost and expense, shall translate such assets and any localized audio required and supply them to Developer. Infogrames agrees that any such costs incurred by Infogrames shall be non-recoupable against royalties due to Developer. (c) Developer, at its sole cost and expense, shall integrate such localized assets with the appropriate code and deliver localized gold masters to Infogrames. Developer shall perform such work in parallel with its work on the English language version of the Product and shall use its best commercially reasonable efforts to complete the localized versions of the Product simultaneously with the English version of the Product. (d) Infogrames shall pay for all of its marketing and promotion, and any costs relating thereto shall be non-recoupable against royalties due to Developer. In the event Developer desires to undertake any such activities, all such activities shall be paid for by Developer. (e) Infogrames shall, at its sole cost and expense, perform quality assurance testing in connection with the Product, the amount and detail of which shall be no less than Infogrames performs in connection with its other "AAA" PC CD-ROM role playing game entertainment software products. In order for Infogrames to perform adequate testing, Developer shall deliver versions or elements of the Product as reasonably requested by Infogrames, including a beta version of the Product, which shall be delivered to Infogrames by no later than April 1, 2002. Developer shall actively consult with Infogrames' quality assurance personnel as Page 5 reasonably requested and required while Infogrames is testing the Product Infogrames agrees that any costs incurred by Infogrames in connection with the quality assurance testing shall be non- recoupable against royalties due to Developer. 20. Schedule B is hereby deleted in its entirety and replaced with the following: "The following components of the Product shall defined as follows: Net Server Code: The Net Server Code is not resident in the Product game code, but is derived from and built upon the GameSpy technology (see section 2 of this Schedule below) licensed for use in Neverwinter Nights 2. The Net Server Code is that code build around GameSpy-licensed code allowing the GameSpy code to work with Neverwinter Nights 2. The Net Server Code allows users to connect over the Internet to a central server - the Net Server (running the Net Server Code derived from Game, Spy). The Net Server provides chat sites and matchmaking Services to connect players to game servers resident on other users' computers for multi-player gameplay (GameSpy matchmaking services). The Net Server Code is depleted graphically in Figure B-1 (attached). Client End Code: The Client End Code is that portion of the Product code that provides CD Key authentication, Login verification services, player registration and tracking service, determines and displays the state of the game that the user is currently playing, and allows for connection to other game servers and the Net Server. The programming code which makes up the Client End Code includes but is not limited to: the BioWare Aurora Engine, the BioWare Chitin Engine, and that code which is specific to the NeverWinter Nights 2 game (said game defined previously as the "Product"), including editors which are specific to the NeverWinter Nights 2 game. The modules in the Client End Code are depicted graphically in Figure B-1 (attached) and include the Player Client, the DM Client, the Constructor Client, the CD Key Authentication and Login Client, the NWN2 Game Core, the Memory Manager, the Auto Patcher, the BioWare Aurora Engine, the BioWare Chitin Engine, Aurora Editors, and Aurora Art. Game Server Code The Game Server Code is that portion of the Product code which coordinates between users the state of the game that is currently being played, allowing for continual activity in a user-defined game world. The Game Server Code communicates with the Net Server Code and also communicates the state of gameplay back to the Client End Code. Further, also in the Game Server Code is the editor for the monitor module of the server, and the server resource editor. The modules in the Game Server Code are depicted graphically in Figure B-1 (attached) and are the Server Network Layer, the Generic Game State Controller, the Resource Editor, and the Server Monitor. 1. The Developer Properties shall consist of the Client End Code and the Game Server Code, specifically including the following components defined as follows: Page 6 As part of the Client End Code: Player Client. The executable that the player uses to connect to the server. This includes the client end network layer. In addition this includes the BioWare Aurora Engine, the BioWare Aurora Engine data structures, the BioWare Chitin Engine, the BioWare Chitin Engine data structure and tools related to both the BioWare Aurora Engine and the BioWare Chitin Engine. The BioWare Aurora Engine: A 3D game engine which includes the 3D display routines, 3D resource, management database, in game console, imbedded script language named Aurorascript, networking code, a suite of Windows interface routines for sound, music, and controllers, and the file formats that contain the 3D art but not the 3D art itself The Chitin Engine: The pre-existing base foundation of libraries already created by the Developer upon which The BioWare Aurora engine is developed. The Chitin Engine interfaces with the Windows operating system and all other supported platforms. Aurora Art: All art specifically created for Aurora, including logos, fonts, tilesets and splash screens. Further, "Aurora Art" shall mean non-D&D related art resources the game uses to generate the game world and associated content. Aurora Art is further defined as the data described herein in both the compiled and pre-compiled formats (OUT screens, Tilesets, Fonts, and Splash Screens): AURORA ART - GUI SCREENS GUI screens are images generated by the game using pre-created still images as components and built to conform to specifically coded formats. This refers to the art, and not the content of the GUI screens. The files containing GUI art are titled: Aurora_GUI.Bif, Aurora_GUI_TP*.ERF (the TP* extension is sequentially lettered - TPA, TPB, TPC, TPD, etc. depending on the number of files we need). A tileset is defined as a grouping of individual tiles that the game uses to generate the background artwork. Each individual tile is composed of a visual mesh and a "walkmesh" approximately 10 meters in game world size. The definition of tileset includes the geometry, textures and programmed characteristics of each tile. The tilesets the game makes use of are: Aurora_CityTiles.BIF, Aurora TerRuralTiles.BIF, Aurora_DngEvilTiles.BIF, Aurora DngMinesTiles.BIF, Aurora-DngSewerTiles.BIF, Aurora_IntCityTiles.BIF, AuroraIntCastleTiles.BIF, Aurora_DngCryptFi1es.BIF. Aurora_TerForestTiles.BIF, Aurora_Microset.BIF Page 7 The Texture Packs for the Tilesets, are found all in a single set of files. Textures are the art that is put on the geometry to generate the graphics seen in the game. The files containing the Tile Texture Packs are: Aurora_Tiles_TP*.ERF (the TP* extension is sequentially lettered - TPA, TPB, TPC, TPD, etc. depending on the number of files we need). AURORA ART - FONTS A font is an image that is converted by the game into readable text characters. One font may be used for multiple languages or a new font may be required for additional language support. Fonts are built either using textures or built via a programmed system of commands. The files containing Fonts are titled Aurora.-GUI.Bif, Aurora-GUT-TP*.ERF (the TP* extension is sequentially lettered - TPA, TPB, TPC, TPD, etc- depending on the number of files we need). AURORA ART - SPLASH SCREENS Splash screens are defined as any screens that contain trademarked BioWare Logos, trademarked BioWare Aurora Engine Logos, and any other trademarked or copyrighted information owned by BioWare that appears in a game screen, The files containing Splash Screens are titled: Aurora_GUI.Bif, Aurora_GUI_TP*.ERF (the TP* extension is sequentially lettered - TPA, TPB, TPC, TPD, etc. depending on the number of files we need) Aurora Editors. A set of game editors that are used to create Missions and levels, place objects and create object properties and also, art conversion and resource management editors. CD Key Authentication and Login Client: This includes all the player client code and the executable that player uses to register player accounts, connect to a session, tracking of player information, as well as the code used to verify CD keys. DM Client: This includes all the player client code and the executable that players use to manage a server session. Constructor Client: This includes any tools used by the player to construct game sessions. This also includes any internal editors used to create NWN2 specific game data. NWN2 Game Core: This includes all the code specifically pertaining to managing a NWN2 game state. This includes the NWN implementation of the D&D rules, game object AI, user interface processing, NWN2 game data files and editing tools. Page 8 Auto Patcher: This is the program that manages the versions of the client and server executables. This program should allow the ability to auto patch from the net server. Memory Manager: This is dynamic memory manger and resource controller. This is the system by which the game core accesses data and resources from the hard drive. As part of the Game Server Code: Server Network Layer: This is the layer that manages all the network packet traffic between the NWN2 game core and the clients. This layer manages the number and type of clients that can attach to the server and is responsible for connecting to and transferring data between the Net server. Generic Game State Controller: This layer manages all game cores being controlled by the server.exe. This layer is responsible for updating the core's game state. This module includes all of the base classes for the game core. (of which the NWN2 Game is derived) and the base classes for the generic game objects which the core controls. Resource Editor: This is the editor suite that manages the game data and resources used by the memory manger. This includes the tools to organize and generate, the bif packed data files. Server Monitor: This program (or module) allows the server operator to manage the number and types of clients that are connected to the server. It will also manager the number and type of game cores that are running on the server. 2. The following materials shall be included within the definition of Developer Properties for the purposes of this Agreement, but the parties acknowledge and agree that these materials are licensed to, and not owned by, Developer: Rad Game Tools - Miles Sound System: This code is incorporated into the NWN Client to play music and sound effects. Rad Game Tools - Bink Video Player: This code is incorporated into the NWN Client to provide playback of compressed movies. GameSpy Code: This is part of the Net Server Code. Code licensed from GameSpy provides matchmaking services (connecting players with vacant servers) and various chat and communication services in the Product." Notwithstanding anything to the contrary contained herein, Developer Properties shall not include any artwork (except for the "Aurora Art", as defined above), audio and text asset, created by Developer in connection with this Agreement. 21. The Agreement is hereby amended to include Exhibit 1, which is a diagram relating to Schedule B-1 of the Agreement, replacing Fig. B-1. 22. The Milestone Schedule is hereby amended to read as follows: Page 9 December 31, 2001 Chapter 4 Writing completed Tutorial/Prelude Plan completed Chapter 1 completed Sound system January 31, 2002 V/O for creatures written QuickChat voicesets for creatures written Prelude completed Chapter 2 content completed pre-QA Chapter 3 content completed pre-QA Chapter 4 content completed pre-QA DM Client Alpha Tilesets completed February 28, 2002 Bug Fixing Design Testing of Game Writing Content Lockdown Further balance testing Game Alpha (Feature complete) DM Client completed March 31, 2002 All Design Content Lockdown Balance testing completed Game Beta April, 2002 Public Beta Final Bug Fixing (only tweaks at this point) April 30,2002 Gold master May 15 2002 Planned release date 23. Schedule A, Section E concerning royalty payments is hereby amended to provide that the first royalty period shall be divided into two royalty periods: royalties from sales before June 30, 2002 shall be paid on August 15, 2002, and royalties from sales between July 1 to July 31, 2002 shall be paid on October 15, 2002. 24. As more fully described below, Developer and Infogrames hereby agree that Developer shall have the right of first refusal in connection with the third party development of two Neverwinter Nights sequel games (the "NWN Sequels"). In the event Infogrames desires that such NWN Sequels be developed, Infogrames shall provide Developer with written notice of its desire to have such NWN Sequels developed, together with the following information (to the extent available): product concept, preliminary design specifications, work-for-hire language, preliminary budgets, proposed release dates, and proposed milestone payments, For any NWN Sequel which is for the PC, the terms and conditions of such first refusal offer shall be, no less favorable than the terms and conditions set forth in this Agreement for the Product for any NWN Page 10 Sequel for consoles, the financial terms of the final agreement shall be subject to the mutual agreement of Infogrames' and Developer. In the event Developer does not notify Infogrames' in writing of its acceptance of the terms and conditions first offered by Infogrames for each NWN Sequel within ten (10) business days of the date Infogrames sent such notice to Developer, Infogrames shall be free to have other parties perform such development with no further obligations to Developer, provided however, that Infogrames may not offer terms to another party that are better than those offered to Developer under this right of first refusal without first offering such terms to Developer, and allowing Developer five business days from the date Infogrames sent Developer such notice to agree in writing to such terms and conditions. After offering Developer the right to develop two NWN Sequels, pursuant to the terms and conditions of this paragraph, Infogrames shall have no further obligations to Developer in connection with such first refusal rights. 25. Each party hereto represents and warrants that (a) it has full power and authority to execute and deliver this Amendment Number Four and to perform its obligations hereunder. and actions on its part necessary for the execution and delivery of this Amendment Number Four and the performance of all of its obligations hereunder have been taken, and (b) this Amendment Number Four has been duly executed and delivered by it and constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms. 26. Except as expressly or by necessary implication modified hereby, the Agreement, as currently constituted, remains in full force and effect. Unless otherwise defined herein, the words and phrases in this Amendment Number Four shall have the same respective definitions given in the Agreement. This Amendment may be executed in counterparts and delivered via facsimile. Facsimile signatures shall be deemed to be original signatures. Accepted arid Agreed: BIOWARE CORP. By: /S/ RAY MUZYKA ------------------------------- Name: Ray Muzyka Title: Joint CEO INTERPLAY ENTERTAINMENT CORP. By: /S/ HERVE CAEN ------------------------------- Name: Herve Caen Title: President INFOGRAMES INTERACTIVE, INC. By: /s/ HARRY RUBIN ------------------------------- Name: Harry Rubin Title: Senior Executive Vice President Page 11 EX-10 6 exhibit10-4.txt EXHIBIT 10.4 Interplay(TM) AMENDED & RESTATED AMENDMENT NUMBER 1 TO PRODUCT AGREEMENT (Hunter: The Reckoning For Xbox and PS2) This AMENDED & RESTATED AMENDMENT NUMBER 1 TO PRODUCT AGREEMENT ("AMENDMENT") is effective as of March 5, 2002, by and between INTERPLAY ENTERTAINMENT CORP., a Delaware corporation ("INTERPLAY") and HIGH VOLTAGE SOFTWARE, INC., an Illinois corporation ("Developer"). RECITALS A. Interplay and Developer previously entered into a Product Agreement dated January 25, 2001 (the "ORIGINAL AGREEMENT"), providing for Developer's development of the Interplay Product entitled "Hunter: The Reckoning" for the Microsoft Xbox platform (hereinafter, the "XBOX PRODUCT"). B. Interplay and Developer subsequently entered into that certain Amendment Number 1 to Product Agreement dated September 2001 (the "FIRST AMENDMENT"), pursuant to which, among other things, the parties: (i) amended the Xbox Product Milestone descriptions, delivery dales and mounts set forth in Schedule C to the Agreement ("Schedule C"); and (ii) modified the royalty rates applicable to the Xbox Product and conversions thereof. C. Prior to execution of this Amendment, (i) Developer has performed and Interplay has accepted the Xbox Product milestones #1 through #1lb of the Agreement, all as set forth in Schedule C to the First Amendment, and (ii) Interplay has paid Developer in full for the Xbox Product milestones #1 through #11a (less an outstanding current balance of $85,000). D. Interplay and Developer now desire to amend and restate the First Amendment in order to, among other things: (i) amend and restate the Xbox Product milestone descriptions, delivery dates and amounts set forth in Schedule C., and (ii) provide for Developer's development of a conversion of the Xbox Product to the Sony PlayStation 2 platform with a working title of "***" (hereinafter, the "PS2 PRODUCT"). AGREEMENT NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Interplay and Developer, intending to be legally bound, have agreed and do hereby agree as follows: - ------------------------ *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 1 1. INCORPORATION. This Amendment is incorporated into the Original Agreement by this reference, and all references hereinafter to the "AGREEMENT" shall include references to the Original Agreement as amended hereby. The First Amendment shall be of no further force or effect. Unless Otherwise defined herein, thc words and phrases in this Amendment shall have thc same respective definitions given in the Original Agreement. Unless the context otherwise dictates, all references in the Original Agreement to the term "Product" shall hereinafter refer to the Xbox Product and the PS2 Product. 2. DEVELOPMENT OF PS2 PRODUCT. (a) AMENDMENT TO XBOX PRODUCT MILESTONES. SCHEDULE C to the Agreement is hereby deleted in its entirety and replaced with the SCHEDULE C attached hereto as ATTACHMENT 1. 3. DEVELOPMENT OF PS2 PRODUCT. (a) ADDITION OF PS2 PRODUCT. The terms and conditions of thc Original Agreement, as mended hereby, shall hereby be extended to include the PS2 Product. (b) MILESTONE SCHEDULES. Developer shall develop thc PS2 Product, and Interplay shall pay royalty advance milestone payments to Developer, in accordance with the Initial Milestone Schedule set forth in ATTACHMENT 2 hereto ("SCHEDULE C-1"). Subject to and upon completion of these initial PS2 Product milestones to the satisfaction of Interplay, and subject to Section 9.01 of the Agreement, Developer and Interplay shall mutually agree upon a detailed PS2 Product milestone and payment schedule for completion of the PS2 Product (the "FINAL PS2 PRODUCT MILESTONE SCHEDULE"), and Developer and Interplay shall incorporate such schedule into the Agreement. As with the Xbox Product milestones payments, all milestone payments set forth in the Initial and Final PS2 Milestone Schedules shall be (1) subject to Interplay's acceptance (which acceptance may be conveyed to Developer by Interplay via e-mail or by writing) of such milestone in accordance with the guidelines set forth in the Agreement, and (2) considered recoupable advances against royalties. Without limitation, the Final PS2 Product Milestone Schedule shall include third-party licensor (e.g., Sony and White Wolf) final approval milestones which must be satisfied before further milestone payments are due. 4. AMENDMENT TO ROYALTY PAYMENTS. Subparagraphs (1), (2) and (3) of Paragraph E of SCHEDULE A to the Agreement ("PAYMENTS: ROYALTY") are hereby deleted in their entirety and replaced with the following: "(1) With respect to the sale or license of the Xbox Product (including OEM sales), a royalty equal to *** percent (***%) of net receipts (as defined below) for retail units ***; *** percent (***%) of net receipts for retail units ***; *** percent (***%) of net receipts for retail units ***; *** percent (***%) of net receipts for retail units ***; and *** percent (***%) of net receipts for retail units *** and above. (2) Developer shall receive the following royalty payments for conversions and derivatives of the Xbox Product: - -------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 2 (a) Except for PC conversions, Developer shall receive a royalty in an amount equal to *** for any exploitation of conversions or derivatives of the Xbox Product (including the PS2 Product) for which Developer performs the development services for Interplay. (i) Developer shall receive a royalty equal to *** percent (***%) of net receipts for retail units *** and *** percent (***%) of net receipts for retail units *** and above for any exploitation of conversions of the Xbox Product to the PC for which Developer performs the development services for Interplay. (b) Developer shall receive a royalty equal to *** of the royalty rate set forth in subparagraph (1) for the exploitation of conversions or derivatives for which Developer does not perform the development services but Interplay utilizes the Developer's Game Engine. In such event Interplay shall pay to Developer the mutually agreed upon fee and Developer agrees such amount shall be an advance against any royalty payments to be paid Developer pursuant to this subsection E(2)(b). (c) Developer shall receive a royalty equal to *** of the royalty rate set forth in subparagraph (1) for the exploitation of conversions or derivatives for which Developer does not perform the development services and Interplay does not utilize the Developer's Game Engine." 5. CROSS-COLLATERALIZATION. Developer acknowledges and agrees that the royalty advance milestone payments made by Interplay to Developer in connection with the Xbox Product and the PS2 Product shall be cross-collateralized. 6. MILESTONE #11B PAYMENT. Interplay agrees to pay Developer the milestone #1lb payment, in the amount of $***, within *** days following the mutual execution and delivery of this Amendment. 7. EFFECT OF DELAY OF MILESTONE # 13. Without limitation, in the event that the Developer fails to timely deliver to Interplay's satisfaction the Xbox Product Milestone 13 deliverables, Interplay thereafter shall incur no further development costs whatsoever associated with the Xbox Product, and any additional development work necessary to achieve final Xbox Milestone 13 deliverables shall be performed and funded solely by Developer. 8. DEVELOPMENT AND DEBUG EQUIPMENT LOAN FOR PS2 PRODUCT. To the extent permitted by Sony Computer Entertainment America, Inc. ("SONY"), Interplay shall provide to Developer the use of four (4) Sony PlayStation 2 development stations, which are valued at *** each, and *** Sony PlayStation 2 "debug" stations, which are valued at *** each, for an aggregate total of *** in Sony equipment (the "PS2 EQUIPMENT"). Upon receipt of the PS2 Equipment, Developer shall provide Interplay with the serial numbers for the PS2 Equipment. Developer hereby represents and warrants that it has executed all agreements required by Sony to allow delivery to Developer of the PS2 Equipment and is in full compliance with the terms of all such agreements. Developer also agrees to the following: (i) Developer shall use the PS2 Equipment solely for the development of the PS2 Product and not for any other - -------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 3 project or purpose; (ii) Developer shall maintain the PS2 Equipment in a safe and secure manner and insure the PS2 Equipment in an amount sufficient to cover the replacement cost of all PS2 Equipment in the event of loss or damage, naming Interplay as the insured on such insurance policy or policies; (iii) Developer shall not loan the PS2 Equipment, or any portion thereof, nor provide the PS2 Equipment, or any portion thereof, to any subcontractor without the prior written consent of Interplay or its designated representative, which consent shall be at Interplay's sole discretion; and (iv) Developer shall consent to inspection of the PS2 Equipment by Interplay, Sony, or their designated representative(s), which inspection shall be at Interplay's and Sony's sole discretion (as applicable), without announcement or prior notice to Developer. Upon request by Interplay, the PS2 Equipment shall be returned to Interplay, at Interplay's expense, (i) in the same condition as provided to Developer, reasonable wear and tear excepted, and (ii) within five (5) days of request by Interplay. Interplay may withhold milestone payment(s) and/or other amounts outstanding to Developer, but not to exceed two (2) times the value of the PS2 Equipment, at the time Interplay requests return of the PS2 Equipment until receipt and acceptance by Interplay of the PS2 Equipment in its entirety. Developer further acknowledges that Developer shall have no right, title or interest in and to the PS2 Equipment. In the event Sony permits and Interplay provides (in its sole discretion) Developer additional Sony PlayStation 2 development and/or debug stations, Developer acknowledges that it shall have no right, title or interest in and to these additional Sony PlayStation 2 development and/or debug stations. 9. CAPITAL. Assuming Interplay's timely delivery of milestone payments in accordance with the terms of the Agreement, Developer represents that it shall continue to be sufficiently staffed and capitalized to undertake and timely complete its development obligations contemplated by the Agreement. 10. INTEREST ON PAST OVERDUE PAYMENTS. Within ten (10) business days after the mutual execution and delivery of this Amendment Interplay shall pay to Developer a one-time additional payment of ***, such amount representing any and all out-of-pocket interest expense incurred by Developer as a direct consequence of milestone payments due to Developer but not timely paid by Interplay as of the date of this Amendment. The Interest Reimbursement Payment shall not be recoupable by Interplay against royalties due under the Agreement. 11. INTEREST ON FUTURE OVERDUE PAYMENTS. From and after the date of this Amendment, Interplay agrees that in the event any milestone advance payments are more than *** days overdue pursuant to the terms of the Agreement, then Interplay shall pay Developer interest, at a rate of ***, on such overdue amounts calculated from the date such milestone payments were due. No such interest payments shall be recoupable by Interplay against royalties. 12. TERMINATION OF PRODUCT. In the event Interplay (or any division thereof) or any successor-in-interest to the Product permanently terminates the development of the Product, Developer shall ***; provided, however, that any such use shall be subject to any and all necessary approvals of Interplay's licensor White Wolf, Inc. at its sole and absolute discretion. - -------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 4 13. NO FURTHER MODIFICATIONS. Except as set forth above, the Original Agreement remains in full force and effect without amendment or modification of any kind. IN WITNESS HEREOF, the parties hereto have executed this Amendment effective as of the date first written above. "INTERPLAY" "DEVELOPER" INTERPLAY ENTERTAINMENT CORP. HIGH VOLTAGE SOFTWARE, INC. By: /S/ JEFF GONZALEZ By: /S/ JOHN W. KOPECKY ---------------------------------- ------------------------------- Name: JEFF GONZALEZ Name: JOHN W. KOPECKY -------------------------------- ------------------------------ Title: CHIEF FINANCIAL OFFICER Title: PRESIDENT ------------------------------- ----------------------------- By: /S/ HERVE CAEN By: /S/ KENNY GANOFSKY ---------------------------------- -------------------------------- Name: HERVE CAEN Name: KENNY GANOFSKY -------------------------------- ------------------------------ Title: CHIEF EXECUTIVE OFFICER Title: CHIEF EXECUTIVE OFFICER ------------------------------- ----------------------------- - -------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Page 5 Attachment 1 SCHEDULE C HUNTER XBOX MILESTONE SCHEDULE Page 6 Attachment 2 SCHEDULE C-1 HUNTER PS2 INITIAL MILESTONE SCHEDULE Page 7 EX-10 7 exhibit10-5.txt EXHIBIT 10.5 FORBEARANCE AGREEMENT This Forbearance Agreement ("Agreement") is entered into as of March 13, 2002, by and among LaSalle Business Credit, Inc. ("Lender"), Brian Fargo ("Guarantor"), Shiny Entertainment, Inc. ("Shiny"), Interplay Entertainment Corp. ("Interplay"), Interplay OEM, Inc. ("OEM") and Gamesonline.com, Inc. ("Games") (Interplay, OEM and Games each referred to as "Co-Borrower" and being jointly referred to herein as "Co-Borrowers"). Lender, Guarantor, Shiny, Interplay, OEM and Games may also be referred to herein individually as a "Party" or collectively as "Parties." RECITALS 1. Lender and Co-Borrowers are the parties to a Loan and Security Agreement dated as of April 11, 2001 (as amended, modified, restated and/or modified from time to time, the "Loan Agreement"), pursuant to which Lender provided certain financial accommodations to Co-Borrowers. 2. Pursuant to the terms of the Loan Agreement, Co-Borrowers granted a security interest in substantially all of their assets in favor of Lender. 3. To induce Lender to enter into the Loan Agreement, Guarantor executed a Limited Individual Guaranty dated as of April 11, 2001 in favor of Lender, under which Guarantor guaranteed payment of up to two million dollars ($2,000,000.00) of the outstanding indebtedness owing to Lender by the Co-Borrowers (the "Fargo Guaranty"). As security for the Fargo Guaranty, Guarantor deposited One Million Dollars ($1,000,000.00) into an account with Lender for that purpose (the "Fargo Collateral"). 4. To induce Lender to enter into the Loan Agreement and (a) to secure its obligations under the Loan Agreement, Interplay executed a Stock Pledge Agreement dated as of April 11, 2001 (the "Stock Pledge Agreement") pursuant to which Interplay pledged to Lender Interplay's interest in the capital stock of Shiny, (b) Shiny executed a Guaranty dated as of April 11, 2001 ("Shiny Guaranty") in favor of Lender, pursuant to which Shiny guaranteed all of the outstanding indebtedness owing to Lender by Co-Borrowers and (c) to secure its obligations under the Guaranty and Co-Borrowers' obligations under the Loan Agreement, Shiny executed a Security Agreement dated as of April 11, 2002 (the "Shiny Security Agreement") pursuant to which Shiny granted a security interest in substantially all of its assets to Lender. 5. In order to satisfy, in part, certain of the obligations that Co-Borrowers owed to Lender, Lender applied the Fargo Collateral, plus all accrued interest on the Fargo Collateral to the outstanding obligations of Co-Borrowers under the Loan Agreement (the "Fargo Deposit"). 6. Lender claims Co-Borrowers still owe Lender an unpaid sum in excess of Five Hundred Ninety Thousand Dollars ($590,000) under the terms of the Loan Agreement, which Lender contends includes principal, interest, contractual fees (including the success fee and any termination fee), costs, expenses and attorneys' fees and costs. 7. The Loan Agreement provides that (a) each Co-Borrower direct all of its account debtors to make all payments on such Co-Borrower's accounts receivable directly to a post office box (the "Lock Box") maintained at LaSalle National Bank (the "Bank"), (b) (i) all payments received in the Lock Box and (ii) all payments and/or proceeds of the disposition of any Collateral received by any Co-Borrower or any affiliate or subsidiary of any Co-Borrower, or any shareholder, officer, director, employee or agent of any of the foregoing Persons or any other Person acting in concert with any Co-Borrower, shall be immediately deposited in an account Page 2 maintained at the Bank (the "Lock Box Account"), which is under the sole and exclusive control of Lender, all as is more fully set forth in paragraph 10 of the Loan Agreement (such funds, the "Cash Collateral"). 8. On or about February 1, 2002, Lender filed an action in the Superior Court of the State of California for the County of Orange (the "Orange County Court"), Case No. 02 CCO2383 against Co-Borrowers, Shiny and Guarantor, styled as LASALLE BUSINESS CREDIT, INC., A DELAWARE CORPORATION, V. INTERPLAY ENTERTAINMENT CORP., A DELAWARE CORPORATION, ET AL, in which Lender alleged INTER ALIA that Co-Borrowers were diverting funds from the Lock Box Account to other accounts owned by Co-Borrowers and not under the control of Lender (the "Action"). On or about February 13, 2002, Guarantor filed a cross-action against Co-Borrowers (the "Cross-Action"). On February 26, 2002, Lender obtained a preliminary injunction in the Action (the "Preliminary Injunction") that, among other things, provided that, effective upon Lender's filing of a bond in the sum of $20,000, all of the Cash Collateral must be deposited directly into the Lock Box Account and enjoined Co-Borrowers from diverting or depositing the Cash Collateral to any account other than the Lock Box Account. The Preliminary Injunction has been duly served on all defendants and is in full force and effect. 9. Guarantor has alleged that Lender may not have had the authority to apply the Fargo Deposit to the obligations of Co-Borrowers under the Loan Agreement, may assert other potential defenses and claims with respect to Lender's application of the Fargo Deposit and has alleged that upon the indefeasible payment in full in cash of all obligations due and owing by Co-Borrowers to Lender, Guarantor will be subrogated to the rights of Lender against Co-Borrowers and Shiny with respect to the payment made to Lender by application of the Fargo Deposit. Guarantor also claims to have present rights of reimbursement and contribution with Page 3 respect to the application of the Fargo Deposit and additional present rights with regard to his alleged subrogation and/or prospective subrogation claims. 10. Interplay is currently in negotiations to sell substantially all of the stock or assets of Shiny to a third party (the "Shiny Transaction"), and anticipates that such sale will close on or before June 30, 2002. 11. Concurrently herewith, Interplay and Guarantor are entering into an Agreement with respect to certain claims that each has against the other (the "Interplay/Fargo Agreement"), including but not limited to Guarantor's alleged claim for subrogation against Interplay. 12. In addition to the above-described disputes, Lender and Co-Borrowers, Lender and Shiny, and Lender and Guarantor each acknowledge and agree that each may have further claims against the other. 13. In an effort to resolve all disputes between Lender and Co-Borrowers and between Lender and Shiny, and all disputes (other than with respect to the Settlement Amount (as increased by the Other Amounts) or any amounts that may be owing under the Documents (as defined herein))between Lender and Guarantor, the Parties have agreed to enter into this Agreement. 14. There are various Events of Default now existing under the Loan Agreement as listed on EXHIBIT A annexed hereto ("Designated Defaults") by reason of which Lender has no obligation to make any additional Loans and Lender has the full legal right to exercise all of its rights and remedies under the Loan Agreement and the other Documents. Co-Borrowers, Shiny and Guarantor have requested that Lender forbear for a period of time from exercising its rights and remedies under the Loan Agreement, Fargo Guaranty, Shiny Guaranty and the Preliminary Page 4 Injunction. Lender is prepared to establish a period of forbearance to Co-Borrowers, Guarantor and Shiny on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: AGREEMENT 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. RECITALS. The recitals contained in this Agreement are a true and correct summary of the facts pertinent to this Agreement and are incorporated herein by this reference. 3. EFFECTIVE DATE. The effective date of this Agreement shall be the date hereof ("Effective Date"). 4. ACKNOWLEDGEMENT. Each Co-Borrower, Guarantor and Shiny acknowledge that the Designated Defaults have occurred and exist as of the date hereof, that any and all cure periods set forth in the Loan Agreement have expired, and that such Co-Borrower and Shiny are, jointly and severally, unconditionally obligated to pay all of their liabilities to Lender including all Liabilities, all without defense, setoff or counterclaim of any kind or nature whatsoever. 5. OUTSTANDING LIABILITIES. Each Co-Borrower and Shiny hereby affirms and acknowledges that (i) as of the Effective Date, there is presently outstanding loans and advances in the aggregate principal Page 5 amount of $590,000 (which amount includes the success fee and any termination fee), together with accrued interest thereon and costs and expenses including attorneys' fees, costs and expenses (collectively, the "Amount") and (ii) the Amount is a valid obligation of Co-Borrowers and is due and owing without defense, claim, setoff or counterclaim of any kind or nature whatsoever. 6. PAYMENT 6.1 Lender agrees to accept, and Co-Borrowers agree to pay to Lender, Five Hundred Thousand Dollars ($500,000.00) (the "Settlement Amount") in full and complete payment of the Amount, as such amount may be increased pursuant to the terms of this Agreement. The Settlement Amount (as increased by the Other Amounts (as hereinafter defined)) shall be paid to Lender by Co-Borrowers as follows: 6.1.1 Contemporaneously with the execution of this Agreement, Co-Borrowers shall pay Lender the sum of One Hundred Thousand Dollars ($100,000.00) (the "First Payment Amount") in immediately available funds. 6.1.2 On or before March 28, 2002 (the "Second Payment Date"), Co-Borrowers shall pay Lender an additional One Hundred Thousand Dollars ($100,000.00) (the "Second Payment Amount") in immediately available funds. 6.1.3 On the earlier to occur of (i) May 28, 2002 or (ii) the closing date of the Shiny Transaction (the "Third Payment Date"), Co-Borrowers shall pay Lender an additional Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Third Payment Amount") in immediately available funds. Page 6 6.1.4 On the earlier to occur of (i) June 30, 2002 or (ii) the closing date of the Shiny Transaction (the "Final Payment Date"), Co-Borrowers shall pay Lender Fifty Thousand Dollars ($50,000) (the "Final Payment Amount") in immediately available funds. 6.1.5 Co-Borrowers shall be entitled to prepay the Settlement Amount (as increased by the Other Amounts) at any time. 6.1.6 The parties hereby acknowledge that during the period commencing on March 1, 2002 and ending on the Effective Date, Lender received $148,000 of Lock Box Funds (the "Pre-Agreement Lock Box Funds"). On the Effective Date, (a) $100,000 of the Pre-Agreement Lock Box Funds shall be applied by Lender to the First Payment Amount and (b) $48,000 of the Pre-Agreement Lock Box Funds shall be applied by Lender to the Second Payment Amount. 6.2 During the period commencing on the Effective Date and ending on the earlier to occur of (i) June 30, 2002, (ii) the closing date of the Shiny Transaction and (iii) the date of any Forbearance Default (as hereinafter defined) (the "Forbearance Period"), (a) the Lockbox Account shall remain in place, and Co-Borrowers agree to comply with all of the terms of the Loan Agreement relating thereto including, without limitation, the provisions of paragraph 10 of the Loan Agreement and (b) Lender shall remit to Interplay (by wire transfer to an account designated by Interplay to Lender in writing) within one (1) Business Day of receipt of good funds in the Lock Box Account (any such funds, the "Lock Box Funds") seventy-five percent (75%) of such Lock Box Funds and (c) Lender shall apply twenty-five percent (25%) of such Lock Box Funds to the payment of the Settlement Amount (as increased by the Other Amounts) (each such payment to the Settlement Amount, a "Lock Box Settlement Payment"). Each Lock Page 7 Box Settlement Payment shall be applied by Lender to the next scheduled payment of the Settlement Amount (as increased by the Other Amounts). The parties hereby acknowledge that since Lender is applying $48,000 to the Second Payment Amount on the Effective Date in accordance with Section 6.1.6 hereof, subject to a Forbearance Default and Section 6.3 hereof, Interplay shall be entitled to receive the first $144,000 of the Lock Box Funds received by Lender following the Effective Date (it being understood that the $48,000 plus $144,000 which equals $192,000 is being distributed in accordance with this Section 6.2). Following the receipt of the first $144,000 of Lock Box Funds after the Effective Date, subject to a Forbearance Default and Section 6.3 hereof, Lender shall continue to distribute and apply the Lock Box Funds in accordance with this Section 6.2. 6.3 In the event that Co-Borrowers fail to pay Lender the Second Payment Amount on or before the Second Payment Date, Co-Borrowers shall incur and pay to Lender a one-time late fee equal to Ten Thousand Dollars ($10,000.00) (the "Second Payment Late Fee"). In the event that Co-Borrowers fail to pay Lender the Second Payment Amount plus the Second Payment Late Fee within five (5) Business Days after the Second Payment Date, then, anything contained in Section 6.2 hereof notwithstanding, Lender shall be entitled to apply all of the Lock Box Funds to the payment of the Second Payment Amount plus the Second Payment Late Fee until such time as the Second Payment Amount plus the Second Payment Late Fee shall have been paid in full in cash whether by application of the Lock Box Funds or the payment by any Co-Borrower with other funds which are not required to be remitted to the Lock Box under the terms of the Loan Agreement and/or the Preliminary Injunction (the "Satisfaction of the Second Payment"). Upon the Satisfaction of the Second Payment, subject to a Forbearance Default, the Page 8 Lender shall continue to distribute and apply the Lock Box Funds in accordance with Section 6.2 hereof. 6.4 Within five (5) Business Days after Lender's receipt of the indefeasible payment in full in cash of the Settlement Amount plus, if applicable, the Other Amounts, as set forth herein and receipt of fully executed releases (it being understood by Co-Borrowers and Shiny that such release shall not adversely affect or release any rights of subrogation Guarantor will have after Full Satisfaction with respect to the Documents or the liabilities against any of the Co-Borrowers and/or Shiny) from all Co-Borrowers, Guarantor and Shiny (and such releases to be in the form of the release set forth in Section 7.1 hereof and shall be dated the date the full satisfaction occurs) (all such amounts and receipt by Lender of all such executed releases, collectively, the "Full Satisfaction"), Lender and Guarantor shall jointly file a request for dismissal without prejudice of the Action and Lender shall file a stipulation with the Court to dismiss the Preliminary Injunction without prejudice. The Cross Action shall be dismissed by Guarantor with prejudice when the Subrogation Claims (as defined herein) are paid in full. 6.5 During all times during the Forbearance Period and at all times following the Forbearance Period prior to the Full Satisfaction, the parties hereto agree that the Preliminary Injunction, the Documents and the terms of this Agreement shall remain in full force and effect. 6.6 Subject to the provisions of Section 6.1 hereof, the Settlement Amount (as increased by the Other Amounts) shall be jointly and severally due and payable in full in cash by Co-Borrowers prior to the termination of this Agreement. 6.7 Each of the following shall constitute a Forbearance Default: 6.7.1 the existence of any Event of Default (other than a Designated Default) under paragraphs 16(b) (to the extent such Event of Default arises out of the breach of a Page 9 covenant related to (i) insurance of the Collateral, (ii) disposition of the Collateral and/or (iii) paragraphs 7, 8, 10(a), 10(e) or 14(c) of the Loan Agreement), 16(d), 16(e), 16(f), 16(g) (provided, that such breach shall only constitute a Forbearance Default to the extent a judgment or order referred to therein remains unsatisfied or undischarged for more than sixty (60) days)and 16(h) (provided, that, an event of default under the Documents referred to herein shall only constitute a Forbearance Default if such event of default is the same type or kind of default as a Material Default provided, further, that it is understood that a revocation or termination of any such Document shall, in any event, constitute a Forbearance Default) of the Loan Agreement (collectively, the "Material Defaults") (the Loan Agreement together with all Other Agreements, as amended, modified, restated or supplemented from time to time, collectively, the "Documents") provided, that, if any Co-Borrower sells any Inventory or Equipment in or outside of the ordinary course of business on an arms length basis for fair consideration and the proceeds of any such sale are remitted directly to the Lock Box, any such sale shall not constitute a Material Default; and 6.7.2 Subject to Section 6.10 hereof, any Co-Borrower, Guarantor and/or Shiny shall fail to keep or perform any of the terms, obligations, covenants or agreements contained herein including, without limitation, the payment of any installment (other than the Second Payment Amount) of the Settlement Amount (as increased by the Other Amounts) on the date such installment becomes due and payable; and 6.7.3 Any representation or warranty of any Co-Borrower, Guarantor and/or Shiny herein shall be false, misleading or incorrect in any material respect; and 6.7.4 Any Co-Borrower, Guarantor and/or Shiny shall fail to comply with the terms of the Preliminary Injunction. Page 10 6.8 Upon the occurrence of a Forbearance Default, Co-Borrowers shall be immediately obligated to pay Lender in full in cash an amount equal to (a) the Settlement Amount outstanding on the date of such Forbearance Default, plus (b) interest on the Settlement Amount for the period commencing on the date of such Forbearance Default and ending on the date of the Full Satisfaction (such period, the "Final Payment Period") at the rate of interest applicable to Revolving Loans which are Prime Rate Loans upon and after an Event of Default (such rate, the "Default Rate") plus (c) all fees scheduled to be paid during the Final Payment Period pursuant to the terms of the Loan Agreement (it being understood that the success fee and any termination fee are included in the Settlement Amount) plus (d) all other amounts payable pursuant to paragraph 18 of the Loan Agreement which have been incurred at any time (including, without limitation, the Lender's costs and expenses and disbursements and reasonable fees of counsel for Lender incurred in connection with the preparation, negotiation, implementation, administration and/or enforcement of this Agreement and/or in any manner relating to or arising out of this Agreement, the Loan Agreement or any Other Agreement (all of the amounts set forth in clauses (b), (c) and (d) above are collectively referred to as, the "Other Amounts"). The Other Amounts shall automatically be added to and included in the Settlement Amount and the Settlement Amount shall be increased by the Other Amounts. The Settlement Amount (as increased by the Other Amounts) shall be deemed to be a Liability under the Loan Agreement and therefore shall be secured by the Collateral pursuant to the terms of the Loan Agreement. In addition, the terms of the Preliminary Injunction as they exist immediately prior to the Effective Date shall apply and Lender shall no longer remit any of the Lock Box Funds to Interplay and Lender shall be immediately entitled to enforce all of its rights and remedies under Page 11 the Documents. All Lock Box Funds shall be applied to the payment of the Settlement Amount (as increased by the Other Amounts). 6.9 The parties hereby agree that the following transactions (the "Payment Transactions") (which have already occurred) shall not be deemed to have been violations of the Preliminary Injunction (it being understood that for purposes of this agreement the Parties are stipulating that the Payment Transactions did not violate the Preliminary Injunction and if any transaction of the same type as the Payment Transactions were or are made at anytime after February 28, 2002, such transactions would violate the Preliminary Injunction): (a) The payment of Interplay's payroll on February 28, 2002 in an amount not exceeding $800,000 in the aggregate from funds received from Tech Pacific, Titus Interactive, S.A., Creative Labs, Sega Corporation and KBK Co. Ltd.; and (b) The payment of checks drawn on or before February 28, 2002 in an amount not exceeding $200,000 in the aggregate from funds received from Tech Pacific. 6.10 Notwithstanding the foregoing paragraphs 4 and 5, and notwithstanding the provisions of Section 6.8 or any other provision of this Agreement, nothing in this Agreement shall be deemed to be an acknowledgment or agreement by Guarantor as to the amount of the alleged outstanding balance under the Loan Agreement, Guaranty, or any other related loan documents; Guarantor reserves all of his alleged rights, claims, defenses, and arguments, if any, solely with respect to the amount of debt set forth herein, or otherwise alleged at any time by Lender or any other party to be owing under the Loan Agreement, Guaranty, or any other related loan documents. Page 12 7. RELEASES. 7.1 Upon the execution of this Agreement, each of Shiny and each Co-Borrower hereby releases, remises, acquits and forever discharges Lender and Lender's employees, agents, representatives, consultants, attorneys, fiduciaries, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations and related corporate divisions (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at laws or in equity, of whatsoever kind or nature, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date of execution hereof, and in any way directly or indirectly arising out of or in any way connected to this Agreement or the Documents including, without limitation, the Action or any claim arising out of the application of the Fargo Deposit by Lender to the obligations of Co-Borrowers (all of the foregoing hereinafter called the "Released Matters"). The foregoing releases shall survive the termination of this Agreement and the Full Satisfaction. Each of Shiny and each Co-Borrower acknowledges that the agreements in this Section are intended to be in full satisfaction of all or any alleged injuries or damages arising in connection with the Released Matters. 7.2 Upon the execution of this Agreement Guarantor hereby releases, remises, acquits and forever discharges the Released Parties from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at laws or in equity, of whatsoever kind or nature, for or because of any matter or things done, omitted or Page 13 suffered to be done by any of the Released Parties prior to and including the date of execution hereof, in any way directly or indirectly arising out of or in any way connected to the application of the Fargo Deposit by Lender to the obligations of Co-Borrowers (all of the foregoing hereinafter called the "Fargo Released Matters"). The foregoing releases shall survive the termination of this Agreement and the Full Satisfaction. Guarantor acknowledges that the agreements in this Section are intended to be in full satisfaction of all or any alleged injuries or damages arising in connection with the Fargo Released Matters. 7.3 Immediately following the date of the Full Satisfaction and the delivery to Lender of a joint written direction for Lender to give a release (which includes a full indemnity of Lender (which is reasonably acceptable to Lender)), executed by each Co-Borrower, Guarantor and Shiny, Lender shall deliver to each Co-Borrower, Guarantor and Shiny a release dated the date of the Full Satisfaction in substantially the form as the release set forth in Section 7.1 hereof. Guarantor will not deliver and will not be expected to deliver the joint written direction referred to in this section unless and until the full amount of the Subrogation Claims are paid (the "Fargo Satisfaction"). 7.4 The releases in this Agreement shall be effective as a bar to all actions, causes of action, suits, claims, liens, or demands of any kind. The Parties hereto acknowledge and agree that they have been advised by legal counsel, are familiar with, and hereby waive the protections of California Civil Code Section 1542 (or any similar provision of any other jurisdiction), which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing Page 14 the release, which if known by him must have materially affected his settlement with the debtor. 7.5 During the Forbearance Period, Lender hereby agrees to forbear from exercising any rights and remedies Lender has pursuant to the Documents provided that (i) such postponement or forbearance shall be without prejudice to any of Lender's rights and remedies under the Loan Agreement or any such other documents; (ii) Lender does not hereby waive any of its remedies, and does not grant to Co-Borrowers, Guarantor and/or Shiny any additional rights to receive notice or to have an opportunity to cure other than as set forth in the Documents; and (iii) Lender does not hereby agree to amend or modify the Documents. 7.6 Shiny affirms all of the Liabilities of Co-Borrowers to Lender including, without limitation the Settlement Amount (as increased by the Other Amounts) and each of Guarantor and Shiny affirms the validity of the Documents, acknowledges and agrees to the continuing authenticity, enforceability and validity of the Fargo Guaranty and the Shiny Guaranty, as the case may be, and to the extent executed by such Person, reaffirms, ratifies and confirms such guaranty in its entirety and agrees that such guaranty shall remain in full force and effect until the date of the Full Satisfaction. 7.7 Notwithstanding anything contained in the foregoing release provisions, or any other provision contained in this Agreement, nothing in this Agreement shall be deemed to affect, impair, delay, impede or otherwise have any adverse effect upon Guarantor's subrogation rights which will arise upon the Full Satisfaction, any rights Guarantor may have as a prospective subrogee, rights of reimbursement, or contribution, or any other similar rights or claims (collectively, "Subrogation Claims") arising against any Person against whom any Subrogation Claims arise by virtue of the Fargo Deposit being utilized to satisfy the obligations of the Co- Page 15 Borrowers to Lender, or Subrogation Claims arising by virtue of any other facts, circumstances, events, documents, or other matters (it being understood that unless Lender expressly consents in writing (the granting of such consent shall be at the sole and absolute discretion of Lender), Guarantor shall not exercise any Subrogation Claims until the Full Satisfaction occurs and that the Subrogation Claims may be subject to various limitations or conditions under applicable law or the Documents). Notwithstanding anything to the contrary in this Section 7.7 or any other provision of this Agreement, Lender shall not be liable to Guarantor whatsoever for his failure to fully enforce and/or realize on the Subrogation Claims. 8. REPRESENTATIONS AND WARRANTIES. Each of Guarantor, Shiny and each Co-Borrower hereby represents and warrants as follows: 8.1 This Agreement, the Loan Agreement and all other Documents to which such Person is a party to are and shall continue to be legal, valid and binding obligations of such Person and are enforceable against such Person in accordance with their respective terms. 8.2 To the extent applicable, such Person has the corporate power, and has been duly authorized by all requisite corporate action, to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by such Person. 8.3 Such Person's execution, delivery and performance of this Agreement does not and will not (i) violate any law, rule, regulation or court order to which such Person is subject, (ii) to the extent applicable, conflict with or result in a breach of such Person's Articles/Certificate of Incorporation or by-laws or any agreement or instrument to which such Page 16 Person is a party or by which it or its properties are bound or (iii) result in the creation or imposition of any lien, security interest or encumbrance on any property of such Person, whether not owned or hereafter acquired, other than liens in favor of Lender. 8.4 Such Person has no defense, counterclaim or setoff with respect to the Documents. 8.5 Other than the Designated Defaults, no Material Defaults exist under the Loan Agreement as of the date hereof and no other Material Defaults would exist after giving effect to this Agreement. 8.6 Lender has and will continue to have a validly perfected, unavoidable first priority lien and security interest in all Collateral, and such Person expressly reaffirms all security interests and liens granted to Lender pursuant to the Documents. 9. WAIVER. Each of Guarantor, Shiny and each Co-Borrower waives and affirmatively agrees not to allege or otherwise pursue any or all defenses, affirmative defenses, counterclaims, claims, causes of action, setoffs or other rights that it may have to contest (a) any Designated Defaults which could be declared by Lender; (b) any provision of the Documents or this Agreement; (c) the security interest of Lender in any property, whether real or personal, tangible or intangible, or any right or other interest, now or hereafter arising in connection with the Collateral; or (d) the conduct of Lender in administering the financing arrangements between Co-Borrower and Lender. 10. EFFECT AND CONSTRUCTION OF AGREEMENT. Except as expressly provided herein, the Documents shall remain in full force and effect in accordance with their respective terms, and this Agreement shall not be construed to: Page 17 10.1.1 impair the validity, perfection or priority of any lien or security interest securing the Liabilities; 10.1.2 waive or impair any rights, powers or remedies of Lender under, or constitute a waiver of, any provision of the Documents upon termination of the Forbearance Period; or 10.1.3 constitute an agreement by Lender or require Lender to extend the Forbearance Period, grant additional forbearance periods, or extend the term of the Loan Agreement or the time for payment of any of the Liabilities. 11. CONFLICTS. In the event of any express conflict between the terms of this Agreement and any of the Documents, this Agreement shall govern. 12. PRESUMPTIONS. Each party hereto acknowledges that it has consulted with and been advised by its counsel and such other experts and advisors as it has deemed necessary in connection with the negotiation, execution and delivery of this Agreement and has participated in the drafting hereof. Therefore, this Agreement shall be construed without regard to any presumption or rule requiring that it be construed against any one party causing this Agreement or any part hereof to be drafted. In this regard, the Parties hereby waive California Civil Code Section 1654. 13. CONDITIONS OF EFFECTIVENESS. This Agreement shall become effective upon satisfaction of the following conditions precedent: Lender shall have received (i) a payment in cash of the $100,000 due on the Effective Date from Co-Borrowers and(ii) four (4) copies of this Agreement executed by Co-Borrowers, Guarantor and Shiny. Page 18 14. EXPENSES. Each party hereto shall be responsible for its own costs and expenses including legal fees, in connection with the negotiation, preparation and administration of this Agreement provided, that, as provided herein, if a Forbearance Default occurs on or after the Effective Date, Co-Borrowers shall, jointly and severally, pay all costs, fees and expenses of Lender (including the costs, fees and expenses of Lender's counsel) incurred by Lender in connection with the negotiation, preparation, administration and/or enforcement of this Agreement and/or the Documents. 15. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement among the parties hereto with respect to the subject matter hereof. Guarantor, Shiny and each Co-Borrower has not relied on any agreements, representations, or warranties of Lender, except as specifically set forth herein. Any promises, representations, warranties or guarantees not herein contained and hereinafter made shall have no force and effect unless in writing, signed by each party hereto. Guarantor, Shiny and each Co-Borrower acknowledges that it is not relying upon oral representations or statements inconsistent with the terms and provisions of this Agreement. 16. FURTHER ASSURANCE. Guarantor, Shiny and each Co-Borrower shall execute such other and further documents and instruments as Lender may reasonably request to implement the provisions of this Agreement. 17. BENEFIT OF AGREEMENT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns as set forth in the Page 19 Loan Agreement. No other person or entity shall be entitled to claim any right or benefit hereunder, including, without limitation, any third-party beneficiary of this Agreement. Lender's agreement to forbear from enforcing certain of its remedies does not in any manner limit Co-Borrower's obligations to comply with, and Lender's right to insist upon compliance with, each and every one of the terms of the Loan Agreement except as specifically modified herein. 18. SEVERABILITY. The provisions of this Agreement are intended to be severable. If any provisions of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or enforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 19. GOVERNING LAW, JURISDICTION, VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applied to contracts to be performed wholly within the State of Illinois. Any judicial proceeding brought by or against any Co-Borrower, Guarantor and/or Shiny with respect to this Agreement or any related agreement may be brought in any court of competent jurisdiction in the State of California, County of Orange, United States of America, and, by execution and delivery of this Agreement, each of Guarantor, Shiny and each Co-Borrower accepts for itself and in connection with its properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Nothing herein shall affect the right to serve process in any manner permitted by law or shall limit the right of Lender to bring proceedings against any Co-Borrower, Shiny and/or Guarantor in the courts of any other Page 20 jurisdiction. Each of Guarantor, Shiny and each Co-Borrower waives any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon FORUM NON CONVENIENS. Any judicial proceeding by any Co-Borrower, Guarantor and/or Shiny against Lender involving, directly or indirectly, any matter or claim in any way arising out of, related to or connected with this Agreement or any related agreement, shall be brought only in a federal or state court located in the County of Orange, State of California. 20. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT, THE DOCUMENTS OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT, THE DOCUMENTS OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS Page 21 OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. IN ADDITION, EACH PARTY WAIVES THE RIGHT TO CLAIM OR RECOVER IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY DAMAGES OTHER THAN OR IN ADDITION TO ACTUAL DAMAGES. 21. SURVIVAL. All indemnities and releases of Guarantor, Shiny, LaSalle and/or Co-Borrowers contained herein and/or provided for herein shall survive the termination of this Agreement and the Full Satisfaction. All other representations, warranties, covenants, agreements, undertakings and waivers (including, without limitation the obligation to pay the Settlement Amount (as increased by the Other Amounts) of Guarantor, Shiny and/or Co-Borrowers contained herein shall survive the termination of the Forbearance Period but shall terminate immediately after the Full Satisfaction and the Fargo Satisfaction. 22. AMENDMENT. No amendment, modification, rescission, waiver or release of any provision of this Agreement shall be effective unless the same shall be in writing and signed by all of the parties hereto. 23. HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 24. FURTHER COOPERATION, ASSURANCES, AND DOCUMENTS. (a) All of the Parties pledge to each other their future cooperation to implement this Agreement. Each of the Parties hereto agrees that it or he (as the case may be) will execute and deliver all documents and instruments and take Page 22 such action as may be necessary and appropriate to effectuate the terms hereof. In connection therewith, after the date of the Full Satisfaction and upon the joint written direction of Co-Borrowers, Guarantor and Shiny which direction shall provide a full indemnity of Lender, reasonably satisfactory to Lender, for Lender taking any and all actions in connection herewith, Lender shall execute such documents as shall be reasonably necessary to terminate Lender's security interest under the Loan Agreement and other documents executed in connection therewith including, without limitation, a Trademark Security Agreement between Interplay and Lender dated April 11, 2001, a Trademark Security Agreement between OEM and Lender dated April 11, 2001, a Security Agreement in Copyrighted Works between Interplay and Lender dated April 11, 2001, a Security Agreement in Copyrighted Works between OEM and Lender dated April 11, 2001, the Shiny Security Agreement and the Stock Pledge Agreement, and shall terminate those other agreements that were entered into as a condition of Lender's execution of the Loan Agreement, including without limitation a Subordination Agreement between Lender and Guarantor dated April 11, 2001, an Intercreditor Agreement among Lender, Guarantor and Interplay dated April 11, 2001, a Subordination Agreement between Lender and Microsoft Corporation ("Microsoft") dated April 11, 2001, an Intercreditor Agreement among Lender, Microsoft and Interplay dated April 11, 2001, the Fargo Guaranty, a Revolving Note ($15,000,000) executed by Interplay in favor of Lender, a Cross Corporate Guaranty between Interplay and Lender dated April 11, 2001, a Cross Corporate Guaranty between OEM and Lender dated April 11, 2001, a Cross Corporate Guaranty between Page 23 Games and Lender dated April 11, 2001, and a Corporate Guaranty between Shiny and Lender dated April 11, 2001 provided that all such documents shall be provided to Lender by Interplay at Interplay's sole cost and expense. (b) In addition, after the date of the Full Satisfaction and upon the joint written direction of Co-Borrowers and Shiny (the "Lock Box Direction") which direction shall provide for a full indemnity of Lender (which shall be reasonably satisfactory to Lender), Lender shall direct the Lock Box Funds to an account set forth in the Lock Box Direction provided, that, (i) if Lender in its reasonable discretion believes, based on conflicting demands or claims, it is prohibited from following the Lock Box Direction under applicable law or by a court order, Lender shall be permitted to follow such court order and/or to interplead all of the Lock Box Funds it receives after the Full Satisfaction with the court which entered such order or with the Orange County Court and (ii) prior to receipt of a Lock Box Direction, Lender shall be permitted to interplead the Lock Box Funds it receives after the Full Satisfaction with the Orange County Court. Notwithstanding anything contained in the foregoing provisions or this Agreement to the contrary, Lender shall be permitted to close the Lock Box at any time after sixty (60) days following the date of the Full Satisfaction. Further, after the date of the Full Satisfaction, Lender shall acknowledge any notice from any Co-Borrower to any account debtor of such Co-Borrower (which notice shall be reasonably acceptable to Lender), which re-directs away from the Lock Box any payments made by such account debtor to such Co-Borrower. Co-Borrowers, Guarantor and/or Shiny hereby agree that Lender shall have no liability Page 24 whatsoever to any Co-Borrower, Guarantor and/or Shiny for complying with any of the provisions of this Section 24 including, without limitation, following the direction of Interplay and Shiny as provided in this paragraph, the interpleading of any Lock Box Funds, the acknowledgement of Lender to any notice to an account debtor of a Co-Borrower or the closing of the Lock Box by Lender. (c) Guarantor will not deliver and will not be expected to deliver any joint written directions referred to in this Section 24 unless and until the Fargo Satisfaction. 25. COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement, any document or instrument entered into, given, or made pursuant to this Agreement or authorized hereby, and any amendment or supplement thereto may be executed in two or more counterparts, and, when so executed, will have the same force and effect as though all signatures appeared on a single document. Any of the Parties may deliver its signature to this Agreement by facsimile and that signature shall be treated as an original for all purposes. Any signature page of this Agreement or of such an amendment, supplement, document, or instrument may be detached from any counterpart without impairing the legal effect of any signatures thereon, and may be attached to another counterpart identical in form thereto but having attached to it one or more additional signature pages. 26. GENDER AND NUMBER. All references herein to the masculine gender shall be deemed to apply equally to the feminine and neuter genders and vice versa. All references herein to the singular shall be deemed to apply equally to the plural and vice versa. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page 25 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above. LASALLE BUSINESS CREDIT, INC., a Delaware corporation By: /S/ ILLEGIBLE ------------------------------- Its: Senior Vice President INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: /S/ HERVE CAEN ------------------------------- Name: Herve Caen Its: President INTERPLAY oeM, INC, a California corporation By: /S/ HERVE CAEN ------------------------------- Name: Herve Caen Its: Authorized Officer gamesonline.com, inc., a Delaware corporation By: /S/ HERVE CAEN ------------------------------- Name: Herve Caen Its: Authorized Officer SHINY ENTERTAINMENT, inc., a Delaware corporation By: /S/ HERVE CAEN ------------------------------- Name: Herve Caen Its: Authorized Officer /S/ BRIAN FARGO ----------------------------------- BRIAN FARGO Page 26 EXHIBIT A DESIGNATED DEFAULTS 1. The Events of Default which have occurred under paragraph 16(b) of the Loan Agreement as a result of Co-Borrowers failure to: (a) remit all proceeds of Collateral received to the Blocked Account in accordance with paragraph 10 of the Loan Agreement; and (b) deliver any Schedules or Reports to Lender in accordance with paragraph 11 of the Loan Agreement. (c) pay to Lender the monies received by Co-Borrowers from VUIPNA with respect to Inventory transferred by Borrower to VUIPNA. Page 27 EX-10 8 exhibit10-6.txt EXHIBIT 10.6 SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement and Release ("Agreement"), dated this 13th day of March, 2002, is entered into by and among Brian Fargo ("Fargo"), Interplay Entertainment, Corp. ("Interplay"), Interplay OEM, Inc., Gamesonline.com, Inc., (collectively "Interplay Parties"), Shiny Entertainment, Inc., ("Shiny"), and Titus Interactive SA ("Titus"). R E C I T A L S A. Brian Fargo is an individual residing at 426 Harbor Island Drive, Newport Beach, California 92660. Interplay is a Delaware corporation with its principal offices located at 16815 Von Karman, Irvine, California 92606. Shiny is a California corporation with its principal place of business at 1088 North Coast Highway, Laguna Beach, California 92651. Titus is a French corporation with its principal place of business in the United States at 20432 Corisco Street, Chatsworth, California 91311. B. There are various disputes between the parties to this Agreement, including, but not limited to, the complaint and cross-complaint in TITUS INTERACTIVE SA V. BRIAN Fargo, Orange County Superior Court Case No. 01CC16340 and a cross-complaint between Fargo and Interplay in LASALLE BUSINESS CREDIT, INC. V. INTERPLAY ENTERTAINMENT CORP., ET AL., Orange County Superior Court Case No. 02CC02383. C. The parties mutually desire to effect a complete settlement of any and all obligations, claims, demands, contentions, and disputes which may exist between them (except as specifically set forth herein) and, for that reason, are entering into this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, agreements and promises set forth herein and other good and valuable consideration, receipt of which is hereby acknowledged by each of the parties, in order to avoid costly and lengthy litigation, without admitting liability on the part of any party, the parties agree as follows: A G R E E M E N T 1. RECITALS. The foregoing Recitals shall be part of this Agreement. 2. STIPULATION FOR ENTRY OF JUDGMENT AND STIPULATED JUDGMENT. The Interplay Parties and Fargo will contemporaneously with executing, and as a condition precedent to, this Agreement, execute a Stipulation for Entry of Judgment and Stipulated Judgment for $1,270,000 in favor of Fargo, in forms attached hereto as Exhibits A and B, satisfactory to Fargo and his counsel, in the case of LASALLE V. INTERPLAY, Orange County Superior Court, Case No. 02CC02383, which Stipulated Judgment will not be filed and entered with the Superior Court unless that amount is not paid in full to Fargo by Interplay by the earlier of (a) July 1, 2002 or (b) the closing date of the transaction by which all or substantially all of the assets or stock of Shiny Entertainment, Inc. ("Shiny") are sold. The date by which such payment is due shall be referred to in this Agreement as the "Payment Date." Notwithstanding the foregoing, the Payment Date under this paragraph shall be extended to the earlier of: (a) August 1, 2002 or (b) until the closing or termination of the Sale Agreement (defined below) if Interplay satisfies each of the Page 1 following requirements: (i) on or before July 1, 2002 Interplay enters into a binding acquisition agreement for the sale for cash of (a) substantially all of the assets of Shiny or (b) in excess of fifty percent (50%) of the voting control represented by the outstanding shares of Shiny (the "Sale Agreement"), AND (ii) such agreement requires, without allowance for extension, a closing date for such sale which is no later than August 1, 2002, AND (iii) Interplay provides written notice of such proposed sale along with copies of the applicable fully executed, definitive sale documents and all related exhibits and schedules to Fargo prior to July 1, 2002. The Stipulation shall be self-executing and the Stipulated Judgment shall be held by Fargo and may be submitted by Fargo for entry upon the failure of the Interplay Parties to satisfy the Stipulated Judgment on or before the Payment Date. Fargo agrees not to take any action to assert any default or claim or to enforce any right with respect to the subject matter of the Stipulation except in accordance with this Agreement, the Stipulation and the Forbearance Agreement; provided that such agreement by Fargo to refrain from any action with respect to the subject matter of the Stipulation shall not apply to actions by Fargo in connection with any bankruptcy proceeding of any of the Interplay Parties or Shiny, nor will that agreement apply to any action required by Fargo to preserve or protect his interests in the collateral or to prevent a dissipation, sale or other diminution of the collateral which is not consistent with or permitted by the applicable loan agreements or by this Agreement. Page 3 3. SALE OR LICENSE OF ASSETS. Notwithstanding any other agreement between the parties, Fargo and the Interplay Parties agree to the following regarding assets of Interplay: a. Interplay may sell or license, without obtaining approval of Fargo, any asset that Interplay does not intend to publish. b. Interplay may sell or license, without obtaining approval of Fargo, up to three "titles" which Interplay intends to publish. (Those "titles" Interplay intends to publish are listed on Exhibit C to this Agreement.) A limitation on this right is that Interplay may only sell or license two of the following three "titles": "Galleon"; "Run Like Hell"; and "Hunter." c. Interplay may sell or license, without obtaining approval of Fargo, any "titles" which Interplay is currently developing or intends to publish for the Advanced Color Gameboy or Gamecube platforms, other than "Galleon" (the sale or license of which shall be subject to clause (b) above). d. Fargo will execute any consents, releases or other documents reasonably required by Interplay and requested in a timely fashion to permit the sale of these assets free of liens or other encumbrances in favor of Fargo. 4. ADDITIONAL AGREEMENTS. The Interplay Parties and Fargo agree to execute, concurrently with execution of, and as a condition precedent to, this Agreement, the following additional agreements (the "Ancillary Agreements"): Page 4 a. Securities Purchase Agreement. (A true and correct copy is attached hereto as Exhibit D); b. Limited Recourse Promissory Note. (A true and correct copy is attached hereto as Exhibit E); c. General Release of Claims re Employment Agreement. (A true and correct copy is attached hereto as Exhibit F); and d. Forbearance Agreement among LaSalle Business Credit, Inc., ("LaSalle"), Fargo, Shiny and the Interplay Parties ("Forbearance Agreement"). (A true and correct copy is attached hereto as Exhibit G.) 5. THREE MILLION DOLLAR SECURED PROMISSORY NOTE. The Three Million and No/100 Dollars ($3,000,000) Secured Promissory Note from Interplay to Fargo dated April 11, 2001 ("Note"), plus all accrued interest due to Fargo pursuant to that Note, shall be paid to Fargo by the Payment Date. Interplay agrees that no setoffs, claims or other arguments of any sort can be used to offset, delay or hinder payment of this obligation, or the enforcement of the collateral therefor. Fargo agrees not to take any action to assert any default or claim or to enforce any right with respect to this Note until the Payment Date; provided that such agreement by Fargo to refrain from any action on the Note shall not apply to actions by Fargo in connection with any bankruptcy proceeding of any of the Interplay Parties or Shiny, nor will that agreement apply to any action required by Fargo to preserve or protect his interests in the collateral or to prevent Page 5 a dissipation, sale, or other diminution of the collateral which is not consistent with or permitted by the applicable loan agreements or by this Agreement. 6. CONDITIONAL RELEASES. If Fargo receives payment in full of the amount of the aforementioned Stipulated Judgment (see paragraph 2 above) and the Secured Promissory Note from Interplay dated April 11, 2001 (see paragraph 5 above) on or before the Payment Date, then Fargo, the Interplay Parties and Titus agree that the following releases and waiver shall be binding and effective between them: a. RELEASE BY TITUS AND INTERPLAY. The Interplay Parties, Shiny and Titus, and each of them, hereby release and forever discharge Fargo and his respective agents, representatives, attorneys, heirs and assigns from any and all claims, rights, liabilities, damages and causes of action of every kind or nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, fixed and contingent, disclosed and undisclosed (collectively, "Claims") arising out of or in any way relating to their respective obligations, activities and/or dealings with one another at any time prior to the date hereof to the present. Specifically excluded from the release of these Claims are (1) Fargo's obligations under this Agreement and the Ancillary Agreements and (2) any Claims relating to or arising out of Fargo's conduct after the date of this Agreement and his continuing duties and obligations under applicable law with respect to Interplay's trade secrets and proprietary information. Page 6 b. RELEASE BY FARGO. Fargo hereby releases and forever discharge each of Titus, Shiny and Interplay, and each of their respective agents, representatives, attorneys, heirs, directors, officers, employees and subsidiaries, from any and all Claims arising out of or in any way relating to their respective obligations, activities and/or dealings with one another at any time prior to the date hereof to the present. Specifically, excluded from the release of these Claims are (1) any claim for indemnification, contractual, statutory, or equitable, arising from or relating to any claim or cause of action brought by any third party; (2) any and all option agreements between Interplay and Fargo; (3) any and all warrants to purchase shares of Interplay common stock granted to Fargo; (4) any claim against Interplay arising out of or related to Fargo's guaranty of Interplay's obligations to Microsoft Corporation; and (5) the Interplay Parties', Shiny's and Titus' obligations under this Agreement and the Ancillary Agreements. c. WAIVER OF UNKNOWN CLAIMS. Each party has been fully advised by his or its respective attorney of the contents of section 1542 of the Civil Code of the State of California, and that section and the benefits thereof, as well as benefits accruing under any comparable provisions of the law of any other jurisdiction, are hereby expressly waived. Section 1542 reads as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Page 7 d. NO PRIOR ASSIGNMENT OR TRANSFER OF CLAIMS. The parties giving the foregoing releases warrant and represent that they are and will continue to be the sole owners of the Claims which they have agreed to release. 7. CONFIRMATION OF FARGO'S SECURITY INTEREST. Nothing in this Agreement shall abrogate, restrict, or otherwise in any fashion cause Fargo to lose any security interest which he otherwise has pursuant to his position as a successor in interest subrogee of LaSalle, the aforementioned $3,000,000 Secured Promissory Note, or any other security interest Fargo may have in the assets or other interests of Interplay or any of its subsidiaries until (1) all sums owed to Fargo have been paid in full, (2) LaSalle is paid in full all amounts with respect to which Fargo may be liable under any guaranty or other obligation, and (3) Microsoft Corporation is paid in full all amounts with respect to which Fargo may be liable under any guaranty or other obligation. Furthermore, Interplay acknowledges and agrees to the validity, enforceability and due perfection of all Fargo's security interests. 8. COOPERATION AND FURTHER ASSURANCES. Fargo agrees to cooperate fully with and assist Interplay in connection with the sale (by means of merger or stock or asset sale) of Shiny. Conditional upon the repayment to Fargo of all amounts due him, Fargo will, to the extent the prior release herein of Shiny is insufficient, (i) release Shiny from any causes of action, claims, obligations, damages, or liabilities, of whatever kind and character, whether now known or unknown, existing as of the closing of the sale, which Fargo has or may have against Shiny; (ii) release any buyer of Shiny from any Page 8 causes of action, claims, obligations, damages, or liabilities, of whatever kind and character, whether now known or unknown, existing as of the closing of the sale, which Fargo has or may have against such buyer arising solely as a consequence of its acquisition of Shiny; (iii) release any security interest held by Fargo in any assets of Shiny; and (iv) take any further action necessary or desirable to assist in the sale of Shiny (including executing and delivering such further instruments and documents) as and to the extent reasonably requested by Interplay, at Interplay's sole cost and expense. 9. MISCELLANEOUS PROVISIONS. Fargo, Interplay and Titus represent, warrant and further agree as follows: a. READING, UNDERSTANDING AND ADVISABILITY. This Agreement has been carefully read, and the contents hereof are known and understood by all, and it is signed freely by each person or entity executing it. Prior to the execution of this Agreement by each party, each party hereto has received independent legal advice by attorneys of its choice with respect to the advisability of executing this Agreement. b. REPRESENTATIONS. Except as expressly stated in this Agreement, no party hereto has made any statement or representation to any other party regarding any fact relied upon by the other party entering into this Agreement, and each party specifically does not rely upon any statement, representation or promise of any other party in executing this Agreement, except as expressly stated in this Agreement. Page 9 c. INTEGRATION. This Agreement constitutes a single, integrated, written contract expressing the entire agreement of the parties hereto relative to the subject matter hereof. No covenants, agreements, representations, or warranties of any kind whatsoever have been made by any party hereto, except as specifically set forth in this Agreement. All prior discussions and negotiations have been and are merged and integrated into, and are superseded by this Agreement. d. GOVERNING LAW. This Agreement shall be construed in accordance with, and be governed by, the laws of the State of California. e. SURVIVAL OF WARRANTIES AND REPRESENTATIONS. The warranties and representations of this Agreement are deemed to survive and shall survive the closing hereof. f. FURTHER ASSURANCES. Each of the parties hereto agrees to take such further action and execute all such further documents as may be necessary or appropriate in order to consummate the settlement and release contemplated hereby. g. DRAFTING. This Agreement shall be construed without regard as to who drafted the Agreement, and this Agreement shall be construed as if all parties hereto participated equally in the drafting of the Agreement. h. SURVIVAL. Wherever possible each provision of this Agreement shall be interpreted in such a manner as to be valid under applicable law, but if any provision of this Agreement shall be invalid or prohibited thereunder, such provision shall be Page 10 ineffective to the extent of such prohibition without invalidating the remainder of such provision or the remaining provisions of this Agreement. i. ATTORNEYS' FEES AND COSTS. In the event legal action is taken by any of the parties hereto to enforce the terms of this Agreement, or any of the exhibits to this Agreement, the prevailing party in such legal action shall recover from the other party its reasonable attorneys' fees and costs incurred in such legal action. j. COUNTERPARTS AND EFFECTIVENESS. This Agreement may be signed in counterparts. The signed counterparts, taken together, shall constitute one Agreement binding on all of the parties. This Agreement shall become effective at such time as counsel for Fargo, Interplay and Titus have delivered to one another counterparts of this Agreement executed by all of the parties. k. AUTHORIZATION TO SIGN. Each of the parties hereby specifically acknowledge that the person signing below on its behalf has the requisite authority to sign this Agreement and that all appropriate approvals and authorizations have been properly obtained. Each of the persons signing below on behalf of a party hereto specifically acknowledge that he or she is duly authorized to sign this Agreement on behalf of the party for which he or she has signed. l. CONFLICTS. In the event of any conflict between the provisions of this Agreement and the Forbearance Agreement as concerns the respective rights and Page 11 liabilities of Fargo, on the one hand, and the Interplay Parties and Shiny, on the other hand, the terms of this Agreement shall control. m. PRELIMINARY INJUNCTION AND LOCKBOX. Notwithstanding the provisions in the Forbearance Agreement regarding termination of the "Preliminary Injunction" and "Lockbox" arrangement described therein, in the event Fargo is not paid the full amount of the Stipulated Judgment by the Payment Date, Fargo shall have the right, immediately following the Payment Date, to: (i) request the court, upon a showing of good cause, to reinstate the Preliminary Injunction previously obtained by LaSalle (or to issue such other relief as may be appropriate); and (ii) reinstate the Lockbox and Blocked Account arrangement under Article 10 of the LaSalle Loan Agreement (as defined in the Forbearance Agreement), by giving written notice of same to Interplay, and the reinstatement of said Lockbox and Blocked Account arrangement shall be pursuant to the terms of the LaSalle loan documents, shall be in favor of Fargo as subrogee, and shall be of the same force and effect as the Lockbox and Blocked Account arrangement in effect immediately prior to the effective date of the Forbearance Agreement. Page 12 IN WITNESS HEREOF, the undersigned parties have executed this Agreement as of the date indicated. Dated: MARCH 13, 2002 /S/ BRIAN FARGO ------------------- ------------------------------------ Brian Fargo Dated: MARCH 13, 2002 INTERPLAY ENTERTAINMENT ------------------- CORP. By: /S/ HERVE CAEN -------------------------------- Name: Herve Caen Its: AUTHORIZED SIGNATORY ------------------------------- Dated: MARCH 13, 2002 INTERPLAY OEM, INC. ------------------- By: /S/ HERVE CAEN -------------------------------- Name: Herve Caen Its: AUTHORIZED SIGNATORY ------------------------------- Dated: MARCH 13, 2002 GAMESONLINE.COM, INC. ------------------- By: /S/ HERVE CAEN -------------------------------- Name: Herve Caen Its: AUTHORIZED SIGNATORY ------------------------------- Dated: MARCH 13, 2002 SHINY ENTERTAINMENT, INC. ------------------- By: /S/ HERVE CAEN -------------------------------- Name: Herve Caen Its: AUTHORIZED SIGNATORY ------------------------------- Page 13 Dated: MARCH 13, 2002 TITUS INTERACTIVE, SA ------------------- By: /S/ ERIC CAEN -------------------------------- Name: Eric Caen Its: MANAGING DIRECTOR ------------------------------ Page 14 EX-10 9 exhibit10-7.txt EXHIBIT 10.7 AGREEMENT This agreement ("Agreement") is made this 19th day of April, 2002 by and between Vivendi Universal Games Inc. (formerly Vivendi Universal Interactive Publishing North America, Inc.) ("VIVENDI"), a Delaware corporation with offices at 6080 Center Drive, Los Angeles, California, 90045, and INTERPLAY ENTERTAINMENT CORP., a Delaware corporation with offices at 16815 Von Karman Avenue, Irvine, California 92606 ("INTERPLAY"), and Shiny Entertainment, Inc., a California corporation ("SHINY" and, together with Interplay, the "SELLER PARTIES," and together with Vivendi, the "PARTIES"). The Parties expect to enter into a more formal agreement with respect to distribution in the form of an amended and restated version of that certain Distribution Agreement, dated August 23, 2001, between Seller and Vivendi, as amended (the "DISTRIBUTION AGREEMENT"), which will be mutually satisfactory to both Interplay and Vivendi (collectively, the "DEFINITIVE AGREEMENT"). Notwithstanding the foregoing or anything else to the contrary, this Agreement shall be deemed valid and legally binding, irrespective of whether or not the Definitive Agreement is ever entered into between the parites. In such event, the Distribution Agreement dated August 23, 2001, shall remain in full force and effect except to the extent that agreement is expressly modifed herein. Unless otherwise defined herein, terms used herein shall bear the same respective meanings ascribed to such terms in the Distribution Agreement. The parties' agreement to the terms set forth herein is expressly subject to any and all conditions set forth herein and is expressly conditioned on the Interplay's sale of Shiny and Closing (as defined herein) on or before April 30, 2002. In consideration of the mutual terms, conditions and covenants hereinafter set forth, the Parties agree as follows: CONDITION PRECEDENT The obligations of the Parties contained herein are conditioned on: (i) the sale of Shiny such that Interplay's current ratio as defined per GAAP (including but not limited to, accruals for litigation fees, claims, assessments and loss contingencies) immediately following closing of the sale of Shiny (the "Closing") (including any and all payments to be made by Interplay to any third parties out of proceeds of the sale of Shiny) being equal to or greater than 1.0, (the "CURRENT RATIO"); (ii) receipt of the Closing Payment (as defined below) by Vivendi at Closing; (iii) the delivery to Vivendi of a fully executed Request for Dismissal by Interplay with prejudice as to all parties of its Cross-Complaint (as defined below); and (iv) the delivery to Interplay of a Page 1 fully executed Request for Dismissal by Vivendi with prejudice as to all parties of the Universal Action (as defined below) (collectively, the "Condition(s) Precedent"). PAYMENT TO VIVENDI AT CLOSE $6,500,000, to be paid to Vivendi at the Closing (the "CLOSING PAYMENT"). For the avoidance of doubt, in the event that all funds provided herein are not released from escrow to Vivendi or if Vivendi does not receive such funds for any reason, then Interplay expressly acknowledges and agrees that this agreement shall be null and void and the Distribution Agreement (including Vivendi's rights and claims with respect to Shiny, the Shiny Assets, and the Matrix) shall remain in full force and effect. The Closing Payment will be treated as a recoupment of Advances paid by Vivendi to Interplay under the Distribution Agreement. Vivendi will retain its existing security interest in the assets of Interplay until it has recouped 100% of the Advances paid to Interplay in connection with the Distribution Agreement, but will, simultaneously with the satisfaction of the Conditions Precedent stated herein, release any and all of Vivendi's claims and security interests in and as to (a) Interplay's equity interest in Shiny, (b) all assets owned, licensed to or developed by Shiny as of the Closing, (c) the titles "Matrix" in all forms and formats and for all platforms, (d) the character engine identified as the Messiah tessellation engine developed for the video gamed titled "Messiah" (the "MESSIAH ENGINE") and the character engine derived from the Messiah Engine for the video game entitled "Sacrifice," each used by Shiny and Interplay (and transferred by Interplay to Shiny), (e) the interactive computer software and video games entitled "Wild 9", "R/C Stunt Copter", "Messiah", "Sacrifice", "MDK", "MDK2", "Earthworm Jim", "Earthworm Jim 2", "Earthworm Jim 2: Menace 2 The Galaxy" and "Earthworm Jim 3D," in all forms and formats and for all platforms, and (f) all tools, engines, copyrights, trademarks, Page 2 patents, graphics, code, documentation, licenses, or other programs or intellectual property rights related to the foregoing items (a) through (f) (collectively, the "SHINY ASSETS"). DISTRIBUTION AGREEMENT TO 1) Vivendi will continue to have exclusive REMAIN UNCHANGED IN ALL distribution rights (excluding online ASPECTS, EXCEPT AS FOLLOWS: rights), in the United States and its possessions, Canada, South America, South Africa, Korea Taiwan and Australia (the "VIVENDI TERRITORIES") to three titles: a) IceWind Dale 2 PC; b) Hunter Xbox; c) RLH PS2; (each a "NEW SELECTED TITLE" and collectively, the "NEW SELECTED TITLES"). The term of Vivendi's exclusive rights to each of these products shall be reduced to twelve-months from delivery of each New Selected Title, which term shall include a "sell-off" period of six-months for inventory manufactured on or before the expiration of such 12 month term. 2) With respect to the New Selected Titles above, Vivendi's distribution rights will remain in effect (and Interplay will take all actions that are reasonable and necessary to ensure such rights remain in effect) in the event Interplay directly or indirectly sells, transfers, assigns, encumbers, or licenses any of the New Selected Titles or development studios holding such New Selected Titles in any manner. 3) Vivendi will continue to have exclusive rights to sell Interplay products currently in distribution by Vivendi (including Baldur's Gate: Dark Alliance PS2, but not including the titles included in the Shiny Assets)(the "BACK CATALOG TITLES"). Vivendi will continue to have exclusive distribution rights (excluding online rights) in the Vivendi Territories to the Back Catalog Titles (including Baldur's Gate: Dark Alliance PS2), per the terms of the existing Distribution Page 3 Agreement, as amended. The term of Vivendi's distribution rights to the Back Catalog Titles shall expire on December 31, 2002, plus an additional six month "sell-off" period for inventory manufactured on or before December 31, 2002, in accordance with the existing Distribution Agreement. 4) Other than the New Selected Titles and the Back Catalog Titles, Vivendi will NOT retain any rights under the Distribution Agreement to distribute any Interplay products. 5) Vivendi will keep all Dark Alliance PS2 proceeds that would otherwise be paid to Interplay commencing with the royalty statement covering the period from February 24, 2002 through March 30, 2002 ("DARK ALLIANCE INTERPLAY PROCEEDS"). The Dark Alliance Interplay Proceeds will be treated as a recoupment of Advances paid by Vivendi to Interplay under the Distribution Agreement. For clarity, upon recoupment of 100% of the Advances, all Dark Alliance Interplay Proceeds shall be paid to Interplay in accordance with Section 6 of the Distribution Agreement. Interplay will pay in a timely fashion all third party royalties owed by Interplay or its affiliates on such proceeds. Interplay acknowledges and agrees that (as between Interplay and Vivendi) Vivendi has no responsibility with respect to such third party royalties. Interplay shall indemnify Vivendi with respect to any and all losses or costs incurred by Vivendi with respect to any claims made by such third parties. 6) In the event that (1) any New Selected Title is not timely delivered to Vivendi or; (2) any Back Catalog Title is terminated (by reason other than the normal expiration of Interplay's rights thereto under any third party license) by Page 4 a third party such that Vivendi is precluded from distributing such Back Catalog Title(s), then in addition to all other rights and remedies Vivendi may have pursuant to the Distribution Agreement, at law or in equity and without waiving any rights or claims, Vivendi may deduct from the Interplay Proceeds Vivendi's remaining unrecouped Advances paid by Vivendi to Interplay under the Distribution Agreement, in an amount equal to Vivendi's projected recoupment from such New Selected Title or Back Catalog Title, as applicable, with respect to such title. Throughout the term(s) stated herein, Interplay shall not have the right to terminate, take any action the result of which would be a termination of Vivendi's rights, or otherwise preclude Vivendi from its exclusive distribution rights as set forth in the Distribution Agreement, as amended with respect to any New Selected Title or Back Catalog Title. VIVENDI SPECIAL RESERVE Vivendi will maintain a Special Reserve equal to 5% of Net Sales from Back Catalog Titles, which amount will be returned to Interplay in full within twenty (20) days following the date that Vivendi recoups all Advances paid under the Distribution Agreement. In the event that Vivendi does not recoup the full amount of all Advances paid under the Distribution Agreement(s), as amended, then Vivendi shall apply the Special Reserve against all unrecouped amounts, and shall remit any remaining amounts of the Special Reserve to Interplay within thirty (30) days of the date that Vivendi actually recoups the full amount of all Advances. RELEASE OF CLAIMS AGAINST Immediately upon the satisfaction of the INTERPLAY AND SHINY Conditions Precedent, Vivendi irrevocably and unconditionally releases and forever discharges Interplay and Shiny, and each of their respective employees, directors, Page 5 officers, subsidiaries, stockholders, successors-in-interest, and assigns from any and all claims and interests in or to or relating to any Shiny Assets and from any and all, existing and, to the extent arising from the actions of the parties on or prior to the Closing, future causes of action, claims, actions, rights, judgments, obligations, damages, demands, accountings or liabilities of whatever kind and character, whether known or unknown, suspected or unsuspected, existing as of the date hereof and as at the date of the Closing (other than claims arising under this Agreement, the Distribution Agreement as amended hereby (excluding claims arising under the Distribution Agreement prior to the Closing), or the Definitive Agreement), which Vivendi (and/or its affiliates) has or may have against Interplay and/or Shiny, or either of them, with respect to the Distribution Agreement, the sale of Shiny, the Shiny Assets, the Universal Action (as defined below) or the Cross-Complaint (as defined below). Vivendi hereby, for itself, its affiliates, and for its attorneys, legal representatives, agents, successors-in-interest and assigns, expressly waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of California and does so understanding and acknowledging the significance and consequences of such specific waiver of Section 1542. Vivendi acknowledges that it is familiar with the provision of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Notwithstanding the foregoing, the releases set forth herein shall expressly not include a release of any claims arising under this Agreement, or arising Page 6 following the Closing under the Distribution Agreement as amended hereby. For the avoidance of doubt, immediately upon the satisfaction of the Conditions Precedent, Vivendi expressly acknowledges and agrees that it (i) has no rights with respect to Shiny or the Shiny Assets under the Distribution Agreement; (ii) irrevocably and unconditionally releases and forever discharges Shiny of all obligations under the Distribution Agreement and any and all other agreements to which Vivendi is a party and by which Shiny or any of the Shiny Assets are bound, or otherwise pledged as collateral/security and (iii) releases any and all liens, encumbrances and/or other security interests held by it or any of its affiliates in and to any portion of the Shiny Assets in accordance with the terms below. RELEASE OF CLAIMS AGAINST Immediately upon the satisfaction of the VIVENDI Conditions Precedent, Interplay irrevocably and unconditionally releases and forever discharges Vivendi, and its respective employees, directors, officers, subsidiaries, stockholders, successors-in-interest, and assigns, from all claims and interests relating to (i) Vivendi's performance under the Distribution Agreement prior to the Closing (excluding, however, Vivendi's obligations to Interplay with respect to accrued but unpaid proceeds due under the Distribution Agreement) or (ii) the conduct of Vivendi in connection with the sale of Shiny or the Shiny Assets, and (iii) except for rights described in the parentheses in the immediately preceding clause (i) the performance of the Distribution Agreement and the terms of this Agreement, from any and all, existing and, to the extent arising (directly or indirectly) from the actions of the parties on or prior to the Closing, future causes of action, claims, actions, rights, judgments, obligations, damages, demands, accountings or liabilities of whatever kind and character, known and unknown, suspected or unsuspected, existing as of the Page 7 date hereof and as at the date of the Closing, which Interplay (and/or Shiny) has or may have against Vivendi, directly or indirectly, with respect to the Distribution Agreement, the sale of Shiny, the Shiny Assets, the Universal Action or the Cross-Complaint. Interplay hereby, for itself, its affiliates, and for its, attorneys, legal representatives, agents, successors-in-interest and assigns, expressly waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of California and do so understanding and acknowledging the significance and consequences of such specific waiver of Section 1542. Interplay acknowledges that it is familiar with the provision of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Notwithstanding the foregoing, the releases set forth herein shall expressly not include a release of any claims arising under this Agreement, or arising following the Closing under the Distribution Agreement as amended hereby. ADDITIONAL COVENANTS 1. Immediately upon the satisfaction of the Conditions Precedent, Vivendi hereby (i) acknowledges and agrees that all liens, encumbrances and/or other security interests held by Vivendi or any of its affiliates in and to any or all of the Shiny Assets, arising from, related to or granted in connection with the Distribution Agreement shall automatically (without any further action by any person) terminate, (provided, however, that as set forth above, Vivendi shall retain, at all times, all liens, encumbrances and/or security interests in all Page 8 other assets and property of Interplay), and (ii) upon reasonable request by Interplay and at Interplay's expense, acknowledges and agrees to provide to Interplay, prior to the Closing, any documents reasonably necessary to terminate all liens, encumbrances and/or other security interests held by Vivendi or any of its affiliates in and to any portion of the Shiny Assets. 2. Except as otherwise provided herein, Interplay agrees that Interplay will use the proceeds from the Shiny sale solely to make payments (i) to third parties, including Vivendi, in connection with or as may be required by the various transactions comprising and related to the Shiny sale, (ii) to pay creditors, and (iii) to pay ordinary course operating expenses, and that it will not use the proceeds of the Shiny sale to redeem any equity securities or to make any dividend until all creditor claims that are beyond customary terms as of the Closing have been satisfied or scheduled for subsequent payment by agreement with the applicable creditor and Interplay has sufficient capital for its contemplated business and to satisfy its obligations as they come due. 3. Interplay acknowledges that (i) the sale of Shiny is conditioned on, among other things, the release by Vivendi of its security interests and claims in the Shiny Assets, (ii) it would not be able to consummate a sale of Shiny without such release, and (iii) Vivendi's security interests in the Shiny Assets are valid, perfected and enforceable. Interplay acknowledges that the consideration being provided to Vivendi under this Agreement, including, without limitation, the Closing Payment, is on account of and commensurate with this release. LAWSUIT FILED FEBRUARY 7, Universal has filed a complaint against 2002 WITHDRAWN Interplay in the Superior Court of the State Page 9 of California, County of Orange, Case No. 02CC02650 (hereinafter referred to as the "UNIVERSAL ACTION"). Vivendi will (i) deliver at Closing, and in satisfaction of the Conditions Precedent, a fully executed Request for Dismissal of the Universal Action, with prejudice as to all parties, and thereafter promptly cause same to be filed with the clerk of the Superior Court. Within two (2) days following the Closing, Vivendi will notify the Superior Court to take the Motion (as defined below) off calendar, with prejudice. CROSS-COMPLAINT FILED Interplay has filed a cross-complaint against MARCH 29, 2002 WITHDRAWN Vivendi in the Superior Court of the State of California, County of Orange, Case No. 02CC02650 hereinafter referred to as the "CROSS-COMPLAINT"). Interplay will deliver to Vivendi at Closing, and in satisfaction of the Conditions Precedent, a fully executed Request for Dismissal to dismiss the Cross-Complaint, with prejudice as to all parties, and thereafter promptly cause same to be filed with the clerk of the Superior Court. VIVENDI TO AGREE TO TAKE Universal has filed a Notice Motion for a APPLICATION FOR Preliminary Injunction (the "MOTION") against INJUNCTION OFF CALENDAR. Interplay in the Superior Court of the State of California, County of Orange, Case No. 02CC02650 which shall be withdrawn and taken off calendar with prejudice as described above. GOVERNING LAW; FORUM This Agreement and the Definitive Agreement will SELECTION; CONSENT TO be governed by California law, and will provide JURISDICTION that an arbitration in Los Angeles County, California will be the sole and exclusive forum for any litigation between the parties. Page 10 ALTERNATIVE DISPUTE This Agreement and the Definitive Agreement RESOLUTION provide for binding arbitration of any disputes, to be held in Los Angeles County, California, under the rules and procedures specified by CPR Institute for Dispute Resolution, and before one of its arbitrators. ATTORNEYS' FEES This Agreement and the Definitive Agreement provide for an award of actual attorneys' fee and other expenses to the prevailing party in any action/proceeding in connection with the Definitive Agreement. INTEGRATION The terms agreed upon herein together with the Distribution Agreement, escrow agreement, escrow instructions, and the Definitive Agreement (including all schedules, exhibits attached thereto) constitute the entire agreement between the parties and supercedes all prior written and oral agreements and understandings with respect to the subject matter set forth herein. Subject to the terms contained herein, both parties acknowledge and agree that the terms and conditions of the Distribution Agreement shall remain in full force and effect. INTERPLAY ENTERTAINMENT CORP. VIVENDI UNIVERSAL GAMES, INC. By: /S/ HERVE CAEN By: /S/ EDWARD ZINSER ------------------------------- ----------------------------------- Herve Caen Edward Zinser Title: Chief Executive Officer Title: Chief Financial Officer SHINY ENTERTAINMENT, INC. By: /S/ DAVID PERRY --------------------------------- David Perry Title: President Page 11 EX-10 10 exhibit10-8.txt EXHIBIT 10.8 TERM SHEET This Agreement (the "AGREEMENT") is made this 26th day of April, 2002 ("EFFECTIVE DATE"), by and between TITUS INTERACTIVE SA ("TITUS"), a French corporation, and INTERPLAY ENTERTAINMENT CORP. ("INTERPLAY"), a Delaware corporation. Interplay and Titus hereto expect to enter into more formal agreement (the "LONG FORM AGREEMENT"), which is mutually satisfactory to both parties and reflects the terms of this Agreement. In connection therewith, the parties shall use their best efforts to complete the Definitive Agreement by 30th day of April, 2002 and in no event later than 30th day of September, 2002. Notwithstanding the foregoing, unless and until such Long Form Agreement is fully executed, this Agreement shall be deemed valid and legally binding. In consideration of the mutual terms, conditions and covenants hereinafter set forth, the parties agree as follows: 1. CONDITION PRECEDENT. The obligations of both parties contained herein would be conditioned on the Shiny Entertainment, Inc. sale closing. 2. PRODUCTS: 1.) Subject to a third party licenses and restrictions therein, interest, approvals or renewals, Interplay will sell, grant and assign to Titus all of Interplay's right, title and interest in the following intellectual property assets ("PROPERTY(IES)"); (a) EarthWorm Jim; (b) Messiah; (c) Wild 9; (d) R/C Stunt Copter; (e) Sacrifice; (f) MDK; (g) MDK II; and h) Kingpin, and all currently existing platforms and versions thereof. 2.) Subject to any third party licenses and restrictions therein, interest approvals or renewals, Interplay will grant to Titus an exclusive, world-wide, nontransferable license to develop, publish, manufacture, sell and distribute solely on Nintendo Advance GameBoy game system the following titles ("TITLE(S)"), for the period of the life of the Titles: (a) Hunter I; (b) Hunter II; (c) Ice Wind Dale I; (d) Ice Wind Dale II; and (e) BG Dark Alliance II. Interplay's only obligation with respect to the Titles is the grant of license hereunder, and in no event shall Interplay be obligated to deliver any code or other assets in connection with the Titles and in no event shall Interplay have any obligation to develop any of the Titles on any platform. All rights not expressly granted herein are reserved by Interplay, including, without limitation, the right to create conversions, derivatives and sequels to the Titles. 3.) In the event the rights granted under this Agreement to any Properties or Titles conflicts with third party licenses or interest or Interplay is unable to receive an approval or Page 1 renewal from a third party licensor, Interplay shall have the right to cancel such Property or Title from this Agreement and provide Titus with a replacement Property or Title of similar quality and genre to such cancelled Property or Title. 3. CONSIDERATION: As full and complete consideration for the rights granted herein, Titus agrees to execute the Convertible Promissory Note ("PROMISSORY NOTE") in Attachment 1, attached hereto and incorporated herein by reference, which provides that Titus unconditionally promises to pay to the order of Interplay, the principal sum of $3,500,000 and any unpaid accrued interest thereon at a rate equal to 6% per annum. The principal amount of the Promissory Note, and any unpaid interest accrued thereon, shall be due and payable in full on August 31, 2002 ("MATURITY DATE"). 4. FULFILLMENT LICENSE Concurrently with the grant of rights set forth above, Titus (including its successors and assigns) hereby grants to Interplay and its successors and assigns, an irrevocable and royalty-free license in and to the Properties (and all intellectual property herein) to the extent necessary for Interplay and its subsidiaries, including, but not limited to, Interplay OEM Inc. and GameOnline.com, Inc., to fulfill their obligations under currently existing agreements pertaining to the Properties (the "FULFILLMENT LICENSE"). 5. THIRD PARTY NEGOTIATIONS: For a period of ninety (90) days from the Effective Date of this Agreement, Interplay may solicit offers from and negotiate with third parties to acquire rights to the Properties and Titles granted under this Agreement, with substantially similar terms ("THIRD PARTY DEAL"). In the event Interplay enters into a binding agreement in connection with a Third Party Deal for an amount in excess of $3,500,000, Interplay can rescind Agreement and recover all rights granted and release Titus from all obligations thereunder. 6. CUSTOMARY TERMS: The Long Form Agreement will contain the terms of this Agreement and the standard terms and conditions utilized by Interplay for agreements of this nature. 7. GUARANTEE: Interplay agrees to use good faith efforts to assist Titus in the development and marketing of the Properties and Titles that will enable Titus to achieve gross sales of at least $3,500,000 ("SALES") in connection with the exploitation of the Properties and Titles within 14 months of the Effective Date ("ACHIEVEMENT"). For clarity, the foregoing sentence shall not obligate Interplay to pay any money to Titus or any third Page 2 party. Titus agrees to use best commercial efforts to attain the Achievement. In the event the Achievement is not attained and failure to attain the Achievement is not a result of Titus' failure to use best commercial efforts, Interplay will pay to Titus the difference between the Sales and the actual gross sales achieved by Titus within 14 months of the Effective Date, not to exceed $2 Million, in connection with the exploitation of the Properties and Titles. 8. GOVERNING LAW: This Agreement, and the Long Form Agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of France, without regard to conflict of law principles thereof. In the event of any action, suit or proceeding brought under or in connection with this Agreement, or the Long Form Agreement, exclusive venue and jurisdiction shall lie with the French court of competent jurisdiction. ACCEPTED AND AGREED INTERPLAY ENTERTAINMENT CORP. TITUS INTERACTIVE SA By: /S/ HERVE CAEN By: /S/ ERIC CAEN ------------------------- -------------------------------- Name: Herve Caen Name: Eric Caen Title: President and CEO Title: Director General Page 3 EX-10 11 exhibit10-9.txt EXHIBIT 10.9 Convertible Promissory Note PROMISSORY NOTE AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS PROMISSORY NOTE NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - -------------------------------------------------------------------------------- $3,500,000 April 26, 2002 Lagny sur Marne Cedex, France FOR VALUE RECEIVED, Titus Interactive S.A., a French corporation ("BORROWER"), located at Parc de l'esplanade, 12, rue Enrico Fermi, Sant Thibault des Vignes, 77462 Lagny sur Marne, Cedex, France, hereby unconditionally promises to pay to the order of Interplay Entertainment Corp., a Delaware corporation ("HOLDER"), the principal sum of Three Million Five Hundred Thousand Dollars ($3,500,000), and any unpaid accrued interest thereon, as set forth below. The principle amount of this Note, and any unpaid interest accrued thereon, shall be due and payable in full on August 31, 2002 (the "MATURITY DATE") in the manner provided for in SECTION 2 below. 1. INTEREST. Borrower agrees to pay simple interest on the unpaid principal amount hereof. Interest shall accrue from the date hereof until this Note is paid in full at a rate equal to six percent (6%) per annum. Interest shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period during which it accrues. 2. PAYMENT. All payments of principal, interest and all other amounts payable in respect of this Note shall be made, at Borrower's option, (i) in lawful money of the United States of America in immediately available Federal funds by cashier's check or by wire transfer to an account furnished to Borrower in writing for that purpose or (ii) in shares of capital stock of Borrower as provided for in SECTION 4 below, on the Maturity Date. 3. PREPAYMENT. Borrower may prepay, without penalty, this Note, in whole or in part at any time prior to the Maturity Date. Any partial prepayment shall not affect the obligation to continue to pay in full the amount of the payments hereunder until the entire unpaid principal balance hereof and all accrued interest hereon has been paid in full. Any such prepayment shall be applied first to interest then to principal. 4. PAYMENT IN SHARES OF Capital STOCK. Borrower may pay any amounts due on this Note by delivering to Holder, free and clear of any encumbrances, shares of Borrower's common stock (Sicovam code number 5012) (the "SHARES") equal to the amount due, which Page 1 Shares shall be valued at a price per share equal to ninety percent (90%) of the average closing price of such Shares on the primary stock exchange on which the Shares then actively trade over the five (5) consecutive trading days immediately preceding the payment date. Any Shares delivered to Holder in payment on this Note must be freely tradable by Holder without restriction on the primary stock exchange on which the Shares then actively trade, and must have the same rights, preferences and public trading rights as the majority of Borrower's other publicly traded shares of common stock. 5. TRANSFERS. a) By acceptance hereof, the Holder acknowledges that this Note and the Shares that may be issued as payment under this Note have not been registered under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and the Holder agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note or Shares issued under this Note in the United States of America in the absence of (i) an effective registration statement under the Securities Act as to this Note or such securities and registration or qualification of this Note or such securities under any applicable Blue Sky or state securities laws then in effect, or (ii) an opinion of counsel, reasonably satisfactory to Borrower, that such registration and qualification are not required. b) This Note may not be transferred by Holder without the prior written consent of Borrower. 6. EVENTS OF DEFAULT; REMEDIES. a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (i) Default in the payment of the principal of or interest on the indebtedness evidenced by this Note in accordance with the terms of this Note; (ii) Borrower shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; or (iii) Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) Page 2 shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days more. b) ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SECTION 6(A), the indebtedness evidenced by this Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, Holder at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by this Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidence by this Note: (i) The Holder shall be immediately entitled to exercise any and all rights and remedies possessed by the Holder pursuant to the terms of this Note; and (ii) The Holder shall have any and all other rights and remedies that the Holder may now or hereafter possess at law, in equity or by statute. c) REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to the Holder by this Note is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder now or hereafter existing at law, in equity or by statue. No delay or omission by the Holder to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Note to the Holder may be exercised from time to time and as often as may be deemed expedient by the Holder. 7. NOTICES. Any notice required by the provisions of this Note to be given to the Holder shall be delivered personally, telecopied, or sent by nationally recognized courier service (such as Federal Express), addressed to the Holder at the address appearing on the books of Borrower. The date of personal delivery or telecopy or three (3) business days after the date of delivery to such courier service, as the case may be, shall be the date of such notice. 8. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF FRANCE, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. 9. WAIVERS. Borrower waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and Borrower agrees that its liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by the Holder. Page 3 10. ATTORNEYS' FEES. Borrower promises to pay all reasonable costs and expenses, including attorneys' fees, incurred in the collection and enforcement of this Note, including without limitation, enforcement before any court and including all appellate proceedings. 11. SEVERABILITY. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note and shall be interpreted so as to be effective and valid. IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the day and year and at the place first written above. TITUS INTERACTIVE S.A., a French corporation By: /S/ ERIC CAEN ------------------------------------ Name: Eric Caen Title: Director General Page 4 EX-10 12 exhibit10-10.txt EXHIBIT 10.10 THIS AMENDED AND RESTATED SECURED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS AMENDED AND RESTATED SECURED CONVERTIBLE PROMISSORY NOTE NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - -------------------------------------------------------------------------------- $2,000,000 April 30, 2002 Irvine, California INTERPLAY ENTERTAINMENT CORP. AMENDED AND RESTATED SECURED CONVERTIBLE PROMISSORY NOTE FOR VALUE RECEIVED, Interplay Entertainment Corp., a Delaware corporation ("PAYOR"), located at 16815 Von Karman Avenue, Irvine, California, 92606, hereby unconditionally promises to pay to the order of Warner Bros., a division of Time Warner Entertainment Company, L.P. ("PAYEE"), and its successors, endorsees, transferees, and assigns (together with Payee, "HOLDER"), the principal sum of Two Million Dollars ($2,000,000) and any unpaid accrued interest thereon, as set forth below. This Amended and Restated Secured Convertible Promissory Note ("CONVERTIBLE NOTE") amends, restates, replaces, and supercedes for all purposes that certain Secured Convertible Promissory Note dated of even date herewith which has been cancelled by Holder and returned to Payor concurrently with the delivery of this Convertible Note. The principal amount of this Convertible Note, and any unpaid interest accrued thereon, shall be due and payable in full on April 30, 2003 ("MATURITY DATE") in the manner provided for in SECTION 3 and SECTION 4 below, unless this Convertible Note shall have been previously converted as provided in SECTION 5 below. 1. SECURITY AGREEMENT. Payor's obligations under this Convertible Note are secured by the collateral set forth in that certain Security Agreement of even date herewith between Payee and Payor (the "SECURITY AGREEMENT"). All capitalized terms used herein and not defined herein shall have the meanings given such terms in the Security Agreement. 2. INTEREST. Payor agrees to pay simple interest on the unpaid principal amount hereof. Interest shall accrue from the date hereof until this Convertible Note is paid or converted in full at a rate equal to six percent (6%) per annum. Interest shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period during which it accrues. In no event shall the interest paid hereunder, together with any other consideration paid or agreed to be paid for the use, forbearance, or detention of money advanced hereunder, exceed the highest lawful rate permissible under any law which a court of competent jurisdiction may deem applicable hereto. In the event that such a court determines that the Holder has charged, received or contracted to receive interest hereunder in excess of the highest lawful rate permissible, the interest payable hereunder shall automatically be reduced to the maximum rate permitted by law, and the Holder shall promptly refund to Payor any interest received by it in excess of the maximum lawful rate (with such reduction and refund being made first with respect to cash interest amounts paid or payable under this Convertible Note, and thereafter with respect to any other consideration received by the Holder). It is the intent hereof that Payor not pay or contract to pay, and that the Holder not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may lawfully be paid by Payor under applicable law. 3. PAYMENT. All payments of principal, interest, and all other amounts payable in respect of this Convertible Note shall be made by wire transfer in lawful money of the United States of America in immediately available Federal funds, to an account furnished to Payor in writing for that purpose at least two (2) business days prior to the Maturity Date. Holder shall, before disposing of this Convertible Note or any part hereof, make a notation hereon of all principal and interest payments previously made hereunder and of the date to which interest hereon has been paid. 4. PREPAYMENT. The Payor shall have the privilege at any time of prepaying the outstanding principal amount and unpaid interest on this Convertible Note, in whole or in part without penalty or premium. Any such prepayment shall be applied first to interest and then to principal. The Payor will give notice ("PREPAYMENT NOTICE") of any prepayment of this Convertible Note to the Holder, not less than 30 days before the date fixed for such prepayment (each, a "PREPAYMENT DATE"). Any notice of prepayment hereunder shall specify (a) such date or approximate date, as the case may be, for prepayment, (b) the aggregate principal amount of this Convertible Note to be redeemed, and (c) the accrued interest, if any, applicable to the prepayment. Such notice of prepayment shall also certify all facts which are conditions precedent to any such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Convertible Note specified in such notice, together with accrued interest thereon shall become due and payable on the prepayment date, subject to the conditions, if any, specified in the Prepayment Notice. 5. CONVERSION. All unpaid principal and all accrued and unpaid interest due under this note may be converted into shares of Payor's common stock ("COMMON STOCK") as follows: (a) HOLDER CONVERSION; CONVERSION PRICE; NOTICE. On the terms and subject to the conditions set forth in this Convertible Note, the Holder may, (i) upon the Maturity Date convert all or any part of the then unpaid principal amount of this Convertible Note into that number of shares of Payor's Common Stock that results from dividing the Conversion Price (as defined Page 2 below) in effect at the date of conversion into the outstanding principal and unpaid interest amount of this Convertible Note or a specified portion thereof to be converted, and/or (ii) within the 30 day period prior to any Prepayment Date with respect to any amount proposed to be prepaid by Payor in any Prepayment Notice, convert up to the amount of principal and unpaid interest specified to be prepaid in the Prepayment Notice into that number of shares of Payor's Common Stock that results from dividing the Conversion Price in effect at the date of conversion into the portion of this Convertible Note to be converted by Payee; PROVIDED, HOWEVER, that notwithstanding any other provision of this Convertible Note to the contrary, if conversion of the entire principal amount and accrued interest under this Convertible Note would result in issuance upon conversion of this Convertible Note of more than 18,600,000 shares of Payor's Common Stock (as adjusted pursuant to Section 5(e) below, the "CONVERSION CAP"), then the portion of the principal amount and accrued interest under this Convertible Note in excess of the amount that when divided by the applicable Conversion Price yields the Conversion Cap shall not be convertible and shall be due and payable in cash upon the Maturity Date in accordance with SECTION 3 of this Convertible Note. The "CONVERSION PRICE" initially shall be equal to the lower of (a) the amount per share which represents the five day average closing price of a share of Common Stock of Payor on the NASDAQ National Market System for the five business days immediately preceding the date of this Convertible Note, subject to adjustment as set forth in SECTIONS 5(E) AND 5(F), below ("REFERENCE PRICE"), and (b) an amount equal to the average closing price of a share of Payor's Common Stock on the NASDAQ National Market System (or any exchange or system upon which shares of the Payor's Common Stock are then primarily traded) for the five business days ending on the day prior to the date of conversion of this Convertible Note. (b) NOTICE OF CONVERSION. Before the Holder shall be entitled to convert this Convertible Note, the Holder shall surrender this Convertible Note, duly endorsed, to the office of the Payor or any transfer agent for the Convertible Note and shall give 10 days written notice ("HOLDER CONVERSION NOTICE") to the Payor at such office that the Holder elects to convert the same. The Holder Conversion Notice shall be executed by an authorized officer of the Payee and indicate the aggregate amount of unpaid principal of this Convertible Note and accrued interest that the Holder has elected to convert. (c) CONVERSION DATE. Conversion of all or part of this Convertible Note shall be deemed effective upon the date of surrender and delivery of both this Convertible Note and the corresponding Holder Conversion Notice. (d) MECHANICS AND EFFECT OF CONVERSION. (i) NO FRACTIONAL SHARES; NEW NOTE. No fractional shares of Common Stock shall be issued upon conversion of this Convertible Note. In lieu of any fractional shares to which the Holder would otherwise be entitled, the Payor shall pay in cash to the Holder the value of that fractional share as determined by reference to the Conversion Price then in effect. At its expense, the Payor shall, as soon as practicable after the conversion of this Convertible Note, issue and deliver to the Holder a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled upon such conversion (or other securities or cash as the case may be), together with a check payable to the Holder for any cash amounts payable as described above in lieu of fractional shares. In the case of conversion by the Holder, if less than Page 3 the entire unpaid principal amount of this Convertible Note is being converted, a new Note, of like tenor and date, shall be issued by the Payor representing the unpaid principal and interest amount of this Convertible Note after such conversion and carrying the same rights to interest (unpaid, if any, and to accrue) carried by the non-converted portion of this Convertible Note before conversion so that there will not be any loss or gain of interest thereon. Upon conversion of this Convertible Note (whether partially or in full), the Payor shall be forever released from its obligation to pay the principal amount so converted, and from its obligation to pay all accrued but previously unpaid interest on such principal amount. (ii) PAYMENT OF INTEREST UPON CONVERSION. In connection with any conversion hereunder, the amount converted shall first be applied to accrued but previously unpaid interest on the principal amount and then to the principal amount. (iii) CHARGES, TAXES AND EXPENSES. Issuance of a certificate for shares of Common Stock upon the conversion of this Convertible Note shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Payor, and such certificate shall be issued in the name of the Holder. (e) ADJUSTMENT TO REFERENCE PRICE. If the Payor should at any time or from time to time after the date of this Convertible Note ("NOTE DATE") fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, then, following such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), and provided that such stock split, dividend or other distribution is actually effected, the Reference Price and Conversion Cap shall be appropriately decreased in proportion to such increase in the number of outstanding shares of Common Stock. If the number of shares of Common Stock outstanding at any time after the Note Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Reference Price and Conversion Cap shall be appropriately increased in proportion to such decrease in the number of outstanding shares of Common Stock. (f) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination, or Merger (as defined below) transaction provided for elsewhere in this SECTION 5), provision shall be made so that the Holder shall thereafter be entitled to receive upon conversion of this Convertible Note the number of shares of stock or other securities or property of the Payor or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled upon such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this SECTION 5 with respect to the rights of the Holder after the recapitalization to the end that the provisions of this Section 5, including adjustment of the Reference Price and the number of shares issuable upon conversion of this Convertible Note, shall be applicable after that event as nearly equivalent as may be practicable. (g) MERGERS. In the event of a proposed merger involving Payor ("MERGER"), the Payor shall deliver to the Holder a notice setting forth the principal terms of such Merger no later Page 4 than 30 days before the effective date of such Merger. The terms of the Merger shall provide that after the consummation of the Merger, the Holder may convert this Convertible Note into the number of shares of stock or other securities or property which a holder of the number of shares of Payor's Common Stock deliverable upon conversion of this Convertible Note would have been entitled upon such Merger, and the surviving corporation shall be bound by the terms of this Convertible Note. Appropriate adjustment (as determined by the Payor's Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth herein (including all provisions with respect to changes in and other adjustments to the Reference Price provided in Sections 5(e) and 5(f) of this Convertible Note) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of this Convertible Note. (h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Reference Price provided in Sections 5(e), 5(f), and 5(g) of this Convertible Note, upon request by the Holder, the Payor at its expense shall compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Payor shall, upon the written request at any time of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth (a) such adjustment and readjustment, (b) the Reference Price in effect at the time, and (c) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of this Convertible Note. (i) NO IMPAIRMENT. The Payor will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Payor, but will at all times in good faith assist in the carrying out of all the provisions of this Section in order to protect the conversion rights of the Holder from impairment. (j) AUTHORIZED SHARES. At its next annual meeting of stockholders, the Payor shall take all commercially reasonable actions necessary to cause to be authorized, and shall thereafter cause a sufficient number of authorized shares of its Common Stock to be reserved for issuance upon conversion of this Convertible Note in accordance with the terms hereof. This Convertible Note shall not entitle the Holder to any voting rights or other rights as a stockholder of the Payor prior to conversion hereof. (k) LIMITATIONS ON CONVERSION. Notwithstanding anything to the contrary contained in this Convertible Note, this Convertible Note may not be converted, in whole or in part, into conversion shares ("CONVERSION SHARES") unless and until any then-applicable requirements of all federal and state securities laws and regulatory agencies charged with enforcing securities laws shall have been fully complied with to the satisfaction of Payor and its counsel; PROVIDED, HOWEVER, that Payor shall at all times use its best efforts to comply with such requirements. Payor may, in its reasonable discretion, condition any conversion of this Convertible Note upon the Holder's delivery to Payor of a written agreement, in form and substance satisfactory to Payor, whereby the Holder makes, at the time of conversion, such representations and warranties Page 5 to and for the benefit of Payor as are set forth in that certain Investor Representation Letter ("REPRESENTATION LETTER") dated of even date herewith and delivered by Payee to Payor in connection with Payor's execution and delivery to Payee of this Convertible Note, as and to the extent applicable to the issuance of the Conversion Shares upon conversion of this Convertible Note. 6. TRANSFERS. (a) Subject to the provisions of the Representation Letter which are incorporated herein by this reference, this Convertible Note and all rights hereunder are transferable, in whole or in part, upon surrender of the Convertible Note with a properly executed assignment, in the form prescribed by Payor, at the principal office of Payor; PROVIDED, HOWEVER, that, except for transfers by Holder of all or any portion of this Convertible Note to any parent, subsidiary, or affiliate of Holder, this Convertible Note may not be transferred in whole or in part without the prior written consent of Payor. (b) Until any transfer of this Convertible Note is made in the Convertible Note register, Payor may treat the registered Holder as the absolute owner hereof for all purposes; provided, HOWEVER, that if and when this Convertible Note is properly assigned in blank, Payor may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (c) In the reasonable discretion of Payor, Payor may condition any transfer of all or any portion of this Convertible Note (other than a disposition satisfying the conditions set forth in clause (i) of SECTION 6(A) above) upon the transferee's delivery to Payor of a written agreement, in form and substance reasonably satisfactory to Payor, whereby the transferee (i) makes such representations and warranties to and for the benefit of Payor as are comparable to the representations and warranties of the purchaser of this Convertible Note as set forth in the Representation Letter, as and to the extent applicable to the proposed disposition, and (ii) agrees to be bound by the transfer restrictions set forth in this SECTION 6. 7. TRANSFER BY PAYOR. Payor may not assign, and no person may assume, any of the obligations of Payor under this Convertible Note without the prior written consent of Holder, which consent may be granted or withheld in Holder's sole discretion, and any attempt to do so without such consent shall be void. 8. EVENTS OF DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (i) A default in the payment of the principal of or interest on the indebtedness evidenced by this Convertible Note in accordance with the terms of this Convertible Note; or (ii) A material default in the performance by Payor's of its obligations under this Convertible Note (other than a default in payment, which is the subject of clause (i)), which default is not cured within 5 business days after notice thereof from Holder; or Page 6 (iii) A default or event of default shall occur under the Security Agreement and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period. (b) ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SUBSECTION 8(A), the indebtedness evidenced by this Convertible Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, the Holder at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by this Convertible Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Convertible Note: (i) The Holder shall be immediately entitled to exercise any and all rights and remedies possessed by Holder pursuant to the terms of this Convertible Note and the Security Agreement; and (ii) The Holder, shall have any and all other rights and remedies that the Holder may now or hereafter possess at law, in equity, or by statute. (c) REMEDIES CUMULATIVE; NO WAIVER. No failure on the part of the Payee to exercise, and no delay in exercising, and no course of dealing with respect to, any right or remedy under this Convertible Note or the Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by the Payee of any right or remedy hereunder or under the Security Agreement preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies specified in this Convertible Note and the Security Agreement are cumulative and are not exclusive of any other rights or remedies provided by law. 9. REGISTRATION RIGHTS. All shares of Common Stock issuable upon conversion of this Convertible Note shall be "Registrable Securities" entitled to registration rights pursuant to Exhibit 1 to this Convertible Note. 10. NOTICES. Except as otherwise provided herein, each notice, request, or other communication given to any party hereunder shall be in writing (which term includes facsimile or other electronic transmission) and shall be effective (i) when delivered to such party at its address specified below, (ii) when sent to such party by facsimile or other electronic transmission, addressed to it at its facsimile number or electronic address specified below, and such party sends back an electronic confirmation of receipt, or (iii) ten days after being sent to such party by certified or registered United States mail, addressed to it at its address specified below, with first class or airmail postage prepaid: (i) in the case of the Payor, to it at: Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, California 92606 Attn: Corporate Counsel Page 7 Telephone: (949) 553-6655 Facsimile: (949) 252-2820 (ii) in the case of the Payee, to it at: Warner Bros. 4000 Warner Blvd. Burbank, California 91522 Attn: General Counsel Telephone: (818) 954-4223 Facsimile: (818) 954-4768 Any party may change its address or facsimile number for purposes of this Section by giving notice of such change to the other Party in the manner specified above. 11. GOVERNING LAW. This Convertible Note shall be construed in accordance with and governed by the laws of the State of California without regard to California's choice of law rules, and except as otherwise required by mandatory provisions of law. The parties hereto agree than any suit, action, or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Convertible Note or the transactions contemplated hereby shall be brought in the United States District Court for the Central District of California or any court of the State of California sitting in Los Angeles County, California, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action, or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any such suit, action, or proceeding in such court or that any such suit, action, or proceeding which is brought in any such court has been brought in an inconvenient forum. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 12. WAIVERS. Payor waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Convertible Note, and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Convertible Note, and Payor agrees that its liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver, or modification granted or consented to by Holder. 13. ATTORNEYS FEES. Payor promises to pay all reasonable costs and expenses, including attorneys' fees, incurred in the collection and enforcement of this Convertible Note, including, without limitation, enforcement before any court and including all appellate proceedings. Page 8 14. SEVERABILITY. If any provision of this Convertible Note is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, the other provisions of this Convertible Note shall remain in full force and effect in such jurisdiction; and the invalidity or unenforceability of any provision thereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. Page 9 IN WITNESS WHEREOF, Payor has executed and delivered this Convertible Note as of the day and year and at the place first written above. INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: /S/ JEFFREY GONZALEZ ----------------------------------- Jeffrey Gonzalez Title: Chief Financial Officer Page 10 -----END PRIVACY-ENHANCED MESSAGE-----